CHAPTER ONE

1.1. Definitions of Strategic Management

The term strategic management is defined in many ways by different writers. Some of the
definitions include:
1. Strategic management is the process of systematically analyzing various opportunities
and threats vis-à-vis organizational strengths and weaknesses, formulating, and arriving
at strategic choices through critical evaluation of alternatives and implementing them to
meet the set objectives of the organization.
2. Strategic management (SM) can be also defined as the set of decisions and actions
resulting in formulation and implementation of strategies designed to achieve the
objectives of an organization.
3. Strategic Management can be defined as the art and science of formulating,
implementing, and evaluating cross-functional decisions that enable an organization to
achieve its objectives. As this definition implies, strategic management focuses on
integrating management, marketing, finance/accounting, production/operations, research
and development, and computer information systems to achieve organizational success.
The purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long-range planning, in contrast, tries to optimize for
tomorrow the trends of today. Strategic management is all about gaining and maintaining
competitive advantage- what rival firms cannot do. Strategists helps an organization in
gathering, analyzing and organizing information and responsible for the success or failure
of an organization. They may differ in their approach from organization to organization
(philosophies, attitudes, values).
From the above definitions of strategic management one can identify that at least:
 Strategic management is an art and a science of choosing the alternatives from the
designed and available courses
 Strategic management involves set of decisions and actions
 Strategic management enable an organization to achieve its objectives
 Strategic management is concerned with gaining and maintaining competitive
advantage- what rival firms cannot do.

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  Strategists helps an organization in gathering, analyzing and organizing
information and responsible for the success or failure of an organization. They
may differ in their approach from organization to organization (philosophies,
attitudes, values).
According to Robinson and Pearce (2005), strategic management involves attention to no
less than nine critical areas:
1. Determining the mission of the company, including broad statements about its
purpose, philosophy, and goals.
2. Developing a company profile that reflects internal conditions and capabilities.
3. Assessment of the company‘s external environment, in terms of both competitive
and general contextual factors.
4. Analysis of possible options uncovered in the matching of the company profile with
the external environment.
5. Identifying the desired options uncovered when possibilities are considered in light
of the company mission.
6. Strategic choice of a particular set of long-term objectives and grand strategies
needed to achieve the desired options.
7. Development of annual objectives and short-term strategies compatible with long-
term objectives and grand strategies.
8. Implementing strategic choice decisions based on budgeted resource allocations and
emphasizing the matching of tasks, people, structures, technologies, and reward
systems.
9. Review and evaluation of the success of the strategic process to serve as a basis for
control and as an input for future decision making.

These nine areas indicate, strategic management involves the planning, directing, organizing, and
controlling of the strategy-related decisions and actions of the business. By strategy, managers
mean their large-scale, future- oriented plans for interacting with the competitive environment to
optimize achievement of organization objectives. Thus, a strategy represents a firm‘s ―game
plan‖. Although it does not precisely detail all future deployments (people, financial, and
material), it does provide a framework for managerial decisions. A strategy reflects a company‘s
awareness of how to compete, against whom, when, where, and for what.

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1.2. Stages of Strategic Management
The strategic management processconsists of three stages: strategy formulation, strategy
implementation, and strategy evaluation. Strategy formulation includes developing a vision and
mission, identifying an organization‘s external opportunities and threats, determining internal
strengths and weaknesses, establishing long-term objectives, generating alternative strategies,
and choosing particular strategies to pursue. Strategy-formulation issues include deciding what
new businesses to enter, what businesses to abandon, how to allocate resources, whether to
expand operations or diversify, whether to enter international markets, whether to merge or form
a joint venture, and how to avoid a hostile takeover. Because no organization has unlimited
resources, strategists must decide which alternative strategies will benefit the firm most.
Strategy-formulation decisions commit an organization to specific products, markets, resources,
and technologies over an extended period of time. Strategies determine long-term competitive
advantages. For better or worse, strategic decisions have major multifunctional consequences
and enduring effects on an organization. Top managers have the best perspective to understand
fully the ramifications of strategy-formulation decisions; they have the authority to commit the
resources necessary for implementation.
Strategy implementation: requires a firm to establish annual objectives, devise policies,
motivate employees, and allocate resources so that formulated strategies can be executed.
Strategy implementation includes developing a strategy-supportive culture, creating an
effective organizational structure, redirecting marketing efforts, preparing budgets,
developing and utilizing information systems, and linking employee compensation to
organizational performance.
Strategy implementation often is called the ―action stage‖ of strategic management. Implementing
strategy means mobilizing employees and managers to put formulated strategies into action. Often
considered to be the most difficult stage in strategic management, strategy implementation requires
personal discipline, commitment, and sacrifice. Successful strategy implementation hinges upon
managers‘ ability to motivate employees, which is more an art than a science. Strategies
formulated but not implemented serve no useful purpose. Interpersonal skills are especially critical
for successful strategy implementation. Strategy-implementation activities affect all employees and
managers in an organization. Every division and department must decide on answers to questions,
such as ―What must we do to implement our part of the organization‘s strategy?‖ and ―How best

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can we get the job done?‖ The challenge of implementation is to stimulate managers and
employees throughout an organization to work with pride and enthusiasm toward achieving stated
objectives.
Strategy evaluation:is the final stage in strategic management. Managers desperately need to know
when particular strategies are not working well; strategy evaluation is the primary means for
obtaining this information. All strategies are subject to future modification because external and
internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1)
reviewing external and internal factors that are the bases for current strategies, (2) measuring
performance, and (3) taking corrective actions. Strategy evaluation is needed because success today
is no guarantee of success tomorrow! Success always creates new and different problems;
complacent organizations experience demise. Strategy formulation, implementation, and evaluation
activities occur at three hierarchical levels in a large organization: corporate, divisional or
strategic business unit, and functional.

1. Corporate Level
Corporate Level Strategy occupies the highest level of strategic decision-making and covers
actions dealing with the objective of the firm, acquisition and allocation of resources and
coordination of strategies of various SBUs for optimal performance. Such decisions are made by
top management of the organization. Top management of the organization is responsibility to
achieve the planned financial performance of the company in addition to meeting the non-
financial goals viz. social responsibility and the organizational image. Corporate strategy defines
the business in which a company will compete preferably in a way that focuses resources to
convert distinctive competence into competitive advantage.‘ Corporate strategy is not the sum
total of business strategies of the corporation but it deals with different subject-matter. The
corporate level strategies translate the orientation of the stakeholders and the society into the
forms of strategies for functional or business levels. Corporate Level Strategies is the level where
vision statement of the companies emerges.
2. Strategic business unit Level

Business-level strategy is - applicable in those organizations which have different businesses-and

each business is treated as strategic business unit (SBU). The fundamental concept in SBU is to
identify the discrete independent product/market segments served by an organization. Since each

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product/market segment has a distinct environment, a SBU is created for each such segment. For
each product group, the nature of market in terms of customers, competition, and marketing
channel differs. Therefore, it requires different strategies for its different product groups. Thus,
where SBU concept is applied, each SBU sets its own strategies to make the best use of its
resources (its strategic advantages) given the environment it faces. At such a level, strategy is a
comprehensive plan providing objectives for SBUs, allocation of resources among functional
areas and coordination between them for making optimal contribution to the achievement of
corporate-level objectives.

3. Operational Level/ Functional level Strategy

Functional strategy, as is suggested by the title, relates to a single functional operation and the
activities involved therein. Decisions at this level within the organization are often described as
tactical. Such decisions are guided and constrained by some overall strategic considerations.
Functional strategy deals with relatively restricted plan providing objectives for specific
function, allocation of resources among different operations within that functional area and
coordination between them for optimal contribution to the achievement of the SBU and
corporate-level objectives. Below the functional level strategy, there may be sub-operations-level
strategies as each function may be divided into several sub functions. For example, marketing
strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing
strategies with each sub function strategy contributing to functional strategy.

The following diagram shows the hierarchy of the three levels of strategy

Corporate
level Strategy

SBU Level
(Business) Strategy

Functional (Operational)
Level Strategy

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Note that strategies at all the three levels are interlinked. Business level strategies are derived
from corporate level strategy and functional level strategies from business level strategies.
Higher level strategy generates a lower-level strategy and a lower-level strategy contributes to
the achievement of the objectives of higher-level strategy.

The three levels of strategic decision have varying characteristics due to the varying
responsibility and authority at different levels of management functioning. The following table
shows characteristics of strategic decisions atcorporate, business and functional level strategies.

Table 1.1 Characteristics of Corporate, Business and Functional Level Strategies

Characteristic Corporate Level Business Unit Level Functional Level

Nature Conceptual Conceptual but related to Totally operational
business unit
Measurability Non – measurable Measurable to some extent Quantifiable
Frequency Large spans 5-10 Periodic Annually
years
Adaptability Poor Average High
Character Innovative and Action –Oriented Totally action
creative oriented
Risk High Moderate Low
Profit Large Moderate Low
Flexibility High Moderate Low
Time Long range Medium range Short range
Costs Involved High Medium Low
Cooperation High Medium Low
Needed

By fostering communication and interaction among managers and employees across hierarchical
levels, strategic management helps a firm function as a competitive team. Most small businesses
and some large businesses do not have divisions or strategic business units; they have only the
corporate and functional levels. Nevertheless, managers and employees at these two levels should

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be actively involved in strategic-management activities. Peter Drucker says the prime task of
strategic management is thinking through the overall mission of a business: that is, of asking the
question, ―What is our business?‖ This leads to the setting of objectives, the development of
strategies, and the making of today‘s decisions for tomorrow‘s results. This clearly must be done
by a part of the organization that can see the entire business; that can balance objectives and the
needs of today against the needs of tomorrow; and that can allocate resources of men and money
to key results.

1.3. Key Terms in Strategic Management

Before we further discuss strategic management, we should define nine key terms: competitive
advantage, strategists, vision and mission statements, external opportunities and threats, internal
strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.
Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. This term can
be defined as ―anything that a firm does especially well compare to rival firms.‖ When a firm can
do something that rival firms cannot do, or owns something that rival firm‘s desire, that can
represent a competitive advantage. For example, in a global economic recession, simply having
ample cash on the firm‘s balance sheet can provide a major competitive advantage. Some cash-
rich firms are buying distressed rivals. For example, BHP Billiton, the world‘s largest miner, is
seeking to buy rival firms in Australia and South America. Freeport-McMoRan Copper & Gold
Inc. also desires to expand its portfolio by acquiring distressed rival companies. Pursuit of
competitive advantage leads to organizational success or failure.
Strategic management researchers and practitioners alike desire to better understand the nature
and role of competitive advantage in various industries. Normally, a firm can sustain a
competitive advantage for only a certain period due to rival firms imitating and undermining that
advantage. Thus it is not adequate to simply obtain competitive advantage. A firm must strive to
achieve sustained competitive advantage by:-
1. Continually adapting to changes in external trends and events and internal capabilities,
competencies, and resources and

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2. Effectively formulating, implementing, and evaluating strategies that capitalize upon those
factors. For example, newspaper circulation in the United States is steadily declining. Most
national newspapers are rapidly losing market share to the Internet, and other media that
consumers use to stay informed.
Strategist
Strategists are the individuals who are most responsible for the success or failure of an organ
nization. Strategists have various job titles, such as chief executive officer, president, and owner,
chair of the board, executive director, chancellor, dean, or entrepreneur. Jay Conger, professor of
organizational behavior at the London Business School and author of Building Leaders, says, ―All
strategists have to be chief learning officers. We are in an extended period of change. If our leaders
aren‘t highly adaptive and great models during this period, then our companies won‘t adapt either,
because ultimately leadership is about being a role model.‖ Strategists help an organization gather,
analyze, and organize information. They track industry and competitive trends, develop forecasting
models and scenario analyses, evaluate corporate and divisional performance, spot emerging
market opportunities, identify business threats, and develop creative action plans. Strategic
planners usually serve in a support or staff role. CEO is the most visible and critical strategic
manager. Any manager who has responsibility for a unit or division, responsibility for profit and
loss outcomes, or direct authority over a major piece of the business is a strategic manager
(strategist).
Strategists differ as much as organizations themselves and these differences must be considered
in the formulation, implementation, and evaluation of strategies. Some strategists will not
consider some types of strategies because of their personal philosophies. Strategists differ in their
attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for
profitability, concern for short-run versus long-run aims, and management style.

Vision and Mission Statements

Many organizations today develop a vision statement that answers the question ―What do we
want to become?‖ Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a
single sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South
Carolina, is ―Our vision is to take care of your vision.‖

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Mission statements are ―enduring statements of purpose that distinguish one business from other
similar firms. A mission statement identifies the scope of a firm‘s operations in product and
market terms.‖
It addresses the basic question that faces all strategists: ―What is our business?‖ A clear mission
statement describes the values and priorities of an organization. Developing a mission statement
compels strategists to think about the nature and scope of present operations and to assess the
potential attractiveness of future markets and activities. A mission statement broadly charts the
future direction of an organization. A mission statement is a constant reminder to its employees
of why the organization exists and what the founders envisioned when they put their fame and
fortune at risk to breathe life into their dreams. Here is an example of a mission statement for
Barnes & Noble:
Our mission is to operate the best specialty retail business in America, regardless of the
product we sell. Because the product we sell is books, our aspirations must be consistent with
the promise and the ideals of the volumes which line our shelves.

External Opportunities and Threats

External opportunities and external threatsrefer to economic, social, cultural, demographic,
environmental, political, legal, governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the future. Opportunities and threats
are largely beyond the control of a single organization- thus the word external. In a global
economic recession, a few opportunities and threats that face many firms are listed here:
1. Availability of capital can no longer be taken for granted.
2. Consumers expect green operations and products.
3. Marketing has moving rapidly to the Internet.
4. Consumers must see value in all that they consume
5. Global markets offer the highest growth in revenues etc.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage
of external opportunities and to avoid or reduce the impact of external threats. For this reason,
identifying, monitoring, and evaluating external opportunities and threats are essential for
success. This process of conducting research and gathering and assimilating external information

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is sometimes called environmental scanningor industry analysis. Lobbying is one activity that
some organizations utilize to influence external opportunities and threats.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization‘s controllable activities that are
performed especially well or poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and development, and management
information systems activities of a business. Identifying and evaluating organizational strengths
and weaknesses in the functional areas of a business is an essential strategic management
activity. Organizations strive to pursue strategies that capitalize on internal strengths and
eliminate internal weaknesses. Strengths and weaknesses are determined relative to competitors.
Relative deficiency or superiority is important information. Also, strengths and weaknesses can
be determined by elements of being rather than performance. For example, strength may involve
owner- ship of natural resources or a historic reputation for quality. Strengths and weaknesses
may be determined relative to a firm‘s own objectives. For example, high levels of inventory
turnover may not be strength to a firm that seeks never to stock-out.
Internal factors can be determined in a number of ways, including computing ratios, measuring
performance, and comparing to past periods and industry averages. Various types of surveys also
can be developed and administered to examine internal factors such as employee morale,
production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in pursuing its
basic mission. Long-term takes more than one year. Objectives are essential for organizational
success because they state direction; aid in evaluation; create synergy; reveal priorities; focus
coordination; and provide a basis for effective planning, organizing, motivating, and controlling
activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a
multidimensional firm, objectives should be established for the overall company and for each
division.

Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies

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 may include geographic expansion, diversification, acquisition, product development, market
penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies affect an
organization‘s long-term prosperity, typically for at least five years, and thus are future-oriented.
Strategies have multifunctional or multidivisional consequences and require consideration of
both the external and internal factors facing the firm.
Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach long- term
objectives. Like long-term objectives, annual objectives should be measurable, quantitative,
challenging, realistic, consistent, and prioritized. They should be established at the corporate,
divisional, and functional levels in a large organization. Annual objectives should be stated in
terms of management, marketing, finance/accounting, production/operations, research and
development, and management information systems (MIS) accomplishments. A set of annual
objectives is needed for each long-term objective. Annual objectives are especially important in
strategy implementation, whereas long-term objectives are particularly important in strategy
formulation. Annual objectives represent the basis for allocating resources.
Policies
Policies are the means by which annual objectives will be achieved. Policies include guide- lines,
rules, and procedures established to support efforts to achieve stated objectives. Policies are
guides to decision making and address repetitive or recurring situations. Policies are most often
stated in terms of management, marketing, finance/accounting, production/operations, research
and development, and computer information systems activities. Policies can be established at the
corporate level and apply to an entire organization at the divisional level and apply to a
singledivision, or at the functional level and apply to particular operational activities or
departments. Policies, like annual objectives, are especially important in strategy implementation
because they outline an organization‘s expectations of its employees and managers. Policies
allow consistency and coordination within and between organizational departments. Substantial
research suggests that a healthier workforce can more effectively and efficiently implement
strategies.

1.4. The strategic management approach

There are different approaches to strategic decision making because an organization may differ
from other organizations in terms of:

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1. Degree of formalization in decision making process from highly formalized and structured to
informal and unstructured process.
2. Managerial power relationship from the dominant role of the strategist to compromise of
different interest groups; and
3. Nature of environment from highly complex to simple and stable.
These differences determine the kind of approach individual organizations would adopt in their
decision making process, including strategic decision making, however, various approaches that
are available for adoption in strategic decision making have been described by authors
differently. For example, Mintzberg has classified various approaches into three forms: - These
are entrepreneurial, planning, and adaptive. As against this classification, Steiner et al have a
fivefold classification: formal structured, intuitive anticipatory, entrepreneurial opportunistic,
incremental, and adaptive. The difference between these two sets of classification can be
resolved to some extent. Formal structured approach resembles planning approach; incremental
and adaptive approaches have common factors than differences and, therefore can be grouped
together; entrepreneurial approach is basically based on intuition and anticipation as these
elements require high level of vision in strategists to anticipate opportunities and threats posed
by the relevant environment. Therefore, for further analysis, three types of approaches will be
taken.
These are:
1. Entrepreneurial opportunistic approach
2. Formal structured approach, and
3. Adaptive approach.
1. Entrepreneurial Opportunistic Approach
Entrepreneurial opportunistic (or simply entrepreneurial) approach is adopted, generally, by
heads of family managed organizations and is characterized by pushing an organization ahead in
the face of environmental odds. The basic features of strategy making under this approach are as
follows:
 The focus in this approach is on capitalizing the opportunities rather than problem solving.
There is constant search of opportunities in the environment either formally or otherwise.
 Decision power is centralized in the entrepreneur who is capable of, making bold and
unusual decisions.

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  The bold and unusual decisions made in the face of environmental uncertainty, lead the
organization to move forward by unusual leaps and thrive with corresponding gains.
 The most important objective in this approach is growth and expansion in assets, turnover,
and market share. Thus, decision making becomes emergent process as against formal
process.

Suitability and Limitations

Entrepreneurial approach is suitable in those organizations where key strategists have very high
stake in the outcomes of a strategy. They are in a position to lead the organization from front
sidelining the views of other stakeholders. Usually, such strategists have very high level of
aspirations, high level of vision about the future business scenarios, and have high risk bearing
profile. A basic advantage of this approach is that such decisions are made which may challenge
the basic principles of management text books. This is the reason that such organizations
outperform their counterparts adopting formal structured approach.
Application of Entrepreneurial Approach
There are numerous examples throughout the world which suggest that organizations have
achieved phenomenal growth through this approach.
 Akio Morita, Chairman of Sony Corporation, Japan, asked his research and design
engineers to design a walkman (a minicassette player). Pat came the reaction that this
would not succeed in the market. But he insisted on that and walkman made a roaring
success.
 Dhirubhai Ambani, Chairman of Reliance Industries, saw the business opportunity in high
priced premium fabrics in India which was unheard at that time. This made roaring success
in the market. Later on, he conceived many projects based on this approach. Today,
Reliance has become number one in the private sector in India.
2. Formal Structured Approach
Formal structured (or simply formal) approach involves strategic decision making in anticipation
of the future state that the organization wants to be in. Strategic decisions are based on
socioeconomic purposes of the organization, values of top management, external opportunities
and threats, and organization‘s strengths and weaknesses. The basic features of this approach are
as follows:

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 Strategy making is based on analysis of various factors which affect the strategy.
 It involves systematic and structured approach to the solution of problems and also the task
of assessing the cost and benefit of various alternatives.
 It is a comprehensive process which produces a set of integrated decisions and strategies.
Suitability and Limitations
Suitability and limitations of formal approach depend on type of organization, management
styles, complexity of environment, complexity of production processes, nature of problems, and
purpose of planning system. Table 1.2 presents the situations which determine the degree of
formalization.
Exhibit Factors affecting degree of formalization in strategic decision making (Table 1.1)

Factor More formalization Less formalization

Large companies Small one-plant companies

Organization
Policy maker Democratic permissive
Management styles
Authoritarian intuitive thinker
Stable Turbulent
Environment
Little competition Severe competition

Long production lead time Short lead time

Production
Process Integrated Processes Simple Processes

High technology Low technology

Long market reaction time, Short market reaction time

Nature of problems Tough, long range Short range

Purpose of planning system Coordinate division activities Train managers

The basic advantage of this approach is that it generates adequate information which enables
decision makers to make decisions in complex situations. However, when decision system
becomes too formalized and highly structured, decision making process becomes slow because
of emergence of professional bureaucracy which relies on standardization of skills. Decision

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 making is decentralized and takes place where the expertise exists. With the result, unusual
decisions are hard to come by.
3. Adaptive Approach
Adaptive approach of strategic decision making is basically reactive and tries to incorporate the
change in decision making context various factors, particularly environmental ones, affecting
strategic decisions. Various features of strategic decision making under adaptive approach are as
follows:
 Decision making is basically meant for problem solving, rather than going for new
opportunities. Adaptation process is adopted to meet the threats by changed environment as
against the decision making to meet the anticipated changes in environment which
entrepreneurial approach suggests.
 Decisions are made in sequential, incremental steps, one thing at a time necessitated by
environmental changes. The basic orientation is to maintain flexibility to adapt the decisions
to more pressing needs.
 Various interest groups and stakeholders put considerable pressure on decision-making
process so as to protect their own interests. Thus, the ultimate decision is a compromised
one which may be, sometimes, at the cost of optimizing organizational effectiveness.
 Since decision-making is incremental and fragmented, there is lack of integrative decision-
making.
Suitability and Limitations
Adaptive approach of strategic decision making is suitable for those organizations, which tend to
play the role of followers rather the role of leaders in the industry sector concerned. This
approach saves them from high risk since the strategic decisions are based‘ on the actual
environmental factors. If these factors are less dynamic, this approach produces satisfactory
results.
However, this approach suffers from one basic limitation. Environmental adaptation as a
continuous process works well so long as there is continuity in environmental changes which can
be assimilated quickly by the organizations adopting this approach. When the environmental
factors change fast, this approach does not work because by the time, the organizations adopt one
change which has some lead time, environment changes further making previous adaptation

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unworkable. In the present context of global competition, perhaps, this approach is not very
suitable to achieve meaningful competitive advantage.
Combining Different Approaches
We have seen above that various approaches of strategic decision making have their positive and
negative aspects and each of these is suitable for particular type of organizations and the nature
of environment. Since there are many variables which affect strategic decision making, many
organizations follow a combination of different approaches. The experts on strategic
management also hold this view, For example, SumantraGhoshal, Professor of Strategic
Leadership, comments that ―it may be useful for Reliance (following entrepreneurial approach)
to think whether it should follow a bit of Hindustan Lever‘s structured processes, just as much as
it may be productive for Hindustan Lever to consider ways of broadening its systems and culture
to the entrepreneurial approach. In fact, Hindustan Lever has restaged the need for infusing
entrepreneurial approach in developing business level strategies. According to its former
Chairman, KekiDadiseth, ―Hindustan Lever has grown in size. While it has its own obvious
benefits, it also brings some drawbacks. What we need to master is the art of creating and
preserving the entrepreneurial ability and connectedness of a small company within a large
company. There may be different ways in which various approaches may be combined together.
More common ways are as follows:
1. Adaptive entrepreneurial
2. Structured adaptive
3. Entrepreneurial structured
4. Adoption of different approaches for different businesses, and
5. Adoption of different approaches at different stages of organizational life. While combining
two or more approaches together, the individual organizations can do better if they evaluate their
culture, human resources, and leadership styles and the nature of environment in which an
organization or its different businesses operations.
1.5.Benefits of Strategic Management

Strategic management allows an organization to be more proactive than reactive in shaping its
own future; it allows an organization to initiate and influence (rather than just respond to)
activities—and thus to exert control over its own destiny. Small business owners, chief executive
officers, presidents, and managers of many for-profit and nonprofit organizations have

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recognized and realized the benefits of strategic management. Historically, the principal benefit
of strategic management has been to help organizations formulate better strategies through the
use of a more systematic, logical, and rational approach to strategic choice. This certainly
continues to be a major benefit of strategic management, but research studies now indicate that
the process, rather than the decision or document, is the more important contribution of strategic
management.
Communication is a key to successful strategic management. Through involvement in the
process, in other words, through dialogue and participation, managers and employees become
committed to supporting the organization.

Strategic-management dialogue is more important than a nicely bound strategic-management

document. The worst thing strategists can do is develop strategic plans themselves and then
present them to operating managers to execute. Through involvement in the process, line
managers become ―owners‖ of the strategy. Ownership of strategies by the people who have to
execute them is a key to success! Although making good strategic decisions is the major
responsibility of an organization‘s owner or chief executive officer, both managers and
employees must also be involved in strategy formulation, implementation, and evaluation
activities. Participation is a key to gaining commitment for needed changes. An increasing
number of corporations and institutions are using strategic management to make effective
decisions. But strategic management is not a guarantee for success; it can be dysfunctional if
conducted haphazardly.

Financial Benefits
Research indicates that organizations using strategic-management concepts are more
profitable and successful than those that do not.
Businesses using strategic-management concepts show significant improvement in sales,
profitability, and productivity compared to firms without systematic planning activities. High-
performing firms tend to do systematic planning to prepare for future fluctuations in their
external and internal environments. Firms with planning systems more closely resembling
strategic-management theory generally exhibit superior long-term financial performance
relative to their industry. High-performing firms seem to make more informed decisions with
good anticipation of both short- and long-term consequences. In contrast, firms that perform

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poorly often engage in activities that are shortsighted and do not reflect good forecasting of
future conditions. Strategists of low-performing organizations are often preoccupied with
solving internal problems and meeting paperwork deadlines. They typically underestimate their
competitors‘ strengths and overestimate their own firm‘s strengths. They often attribute weak
performance to uncontrollable factors such as a poor economy, technological change, or foreign
competition. More than 100,000 businesses in the United States fail annually. Business failures
include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although
many factors besides a lack of effective strategic management can lead to business failure, the
planning concepts and tools described in this text can yield substantial financial benefits for any
organization.

Nonfinancial Benefits
Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such as an enhanced awareness of external threats, an improved understanding of
competitors‘ strategies, increased employee productivity, reduced resistance to change, and a
clearer understanding of performance–reward relationships. Strategic management enhances the
problem-prevention capabilities of organizations because it promotes interaction among
managers‘ at all divisional and functional levels. Firms that have nurtured their managers and
employees, shared organizational objectives with them, empowered them to help improve the
product or service, and recognized their contributions can turn to them for help in a pinch
because of this interaction. In addition to empowering managers and employees, strategic
management often brings order and discipline to an otherwise floundering firm. It can be the
beginning of an efficient and effective managerial system. Strategic management may renew
confidence in the current business strategy or point to the need for corrective actions. The
strategic-management process provides a basis for identifying and rationalizing the need for
change to all managers and employees of a firm; it helps them view change as an opportunity
rather than as a threat. Greenley stated that strategic management offers the following benefits:
1. It allows for identification, prioritization, and exploitation of opportunities.
2. It provides an objective view of management problems.
3. It represents a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.

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6. It creates a framework for internal communication among personnel.
7. It helps integrate the behavior of individuals into a total effort.
8. It provides a basis for clarifying individual responsibilities.
9. It encourages forward thinking.
1.6. Business ethics and corporate social responsibility
Business Ethics
Good ethics is good business. Bad ethics can spoil even the best strategic plans. Business ethics
can be defined as principles of conduct within organizations that guide decision making and
behavior. Good business ethics is a prerequisite for good strategic management; good ethics is
just good business! Strategists such as CEOs and business owners are the individuals primarily
responsible for ensuring that high ethical principles are espoused and practiced in an
organization. All strategy formulation, implementation, and evaluation decisions have ethical
ramifications. Being unethical can be very expensive. A company named Coast IRB LLC in
Colorado recently was forced to close after the Food and Drug Administration (FDA)
discovered in a sting operation that the firm conducted a fake medical study. Coast is one of
many firms paid by pharmaceutical firms to oversee clinical trials and independently ensure that
patient safety is protected. Other business actions considered to be unethical include misleading
advertising or labeling, causing environmental harm, poor product or service safety, padding
expense accounts, insider trading, dumping banned or flawed products in foreign markets, not
providing equal opportunities for women and minorities, overpricing, and sexual harassment.

Code of Business Ethics

A new sign of ethics issues related to product safety, employee health, sexual harassment, AIDS
in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business
practices, cover-ups, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts,
and security of company records has accentuated the need for strategists to develop a clear code
of business ethics. Internet fraud, hacking into company computers, spreading viruses, and
identity theft are other unethical activities that plague every sector of online commerce.
A code of business ethics is a document that provides behavioral guidelines that cover daily
activities and decisions within an organization. Merely having a code of ethics, however, is not
sufficient to ensure ethical business behavior.

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If employees see examples of punishment for violating the code as well as rewards for upholding
the code, this reinforces the importance of a firm‘s code of ethics.

An Ethics Culture
An ethics ―culture‖ needs to permeate organizations! To help create an ethics culture, Citicorp
developed a business ethics board game that is played by thousands of employees worldwide.
Called ―The Word Ethic,‖ this game asks players business ethics questions, such as how do you
deal with a customer who offers you football tickets in exchange for a new, backdated IRA?
Diana Robertson at the Wharton School of Business believes the game is effective because it is
interactive. Many organizations have developed a code of conduct manual outlining ethical
expectations and giving examples of situations that commonly arise in their businesses. Harris
Corporation and other firms warn managers and employees that failing to report an ethical
violation by others could bring discharge. The Securities and Exchange Commission (SEC)
recently strengthened its whistle-blowing policies, virtually mandating that anyone seeing
unethical activity report such behavior. Whistle-blowing refers to policies that require
employees to report any unethical violations they discover or see in the firm.
Bribes
A bribe is a gift bestowed to influence a recipient‘s conduct. The gift may be any money, good,
right in action, property, upgrading, privilege, and emolument, object of value, advantage, or
merely a promise or undertaking to induce or influence the action. Bribery is a crime in most
countries of the world, including the United States.

Love Affairs at Work

A recent Wall Street Journal article recapped current American standards regarding boss-
subordinate love affairs at work. Only 5 percent of all firms sampled had no restrictions on such
relationships; 80 percent of firms have policies that prohibit relationships between a supervisor
and a subordinate. Only 4 percent of firms strictly prohibited such relationships, but 39 percent
of firms had policies that required individuals to inform their supervisors whenever a romantic
relationship begins with a coworker. Only 24 percent of firms required the two persons to be in
different departments. In Europe, romantic relationships at work are largely viewed as private
matters and most firms have no policies on the practice. However, European firms are

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increasingly adopting explicit, American-style sexual harassment laws. The U.S. military strictly
prohibits officers from dating or having sexual relationships with enlistees. At the World Bank,
sexual relations between a supervisor and an employee are considered ―a defacto conflict of
interest which must be resolved to avoid favoritism.‖ World Bank president Paul Wolfowitz
recently was forced to resign due to a relationship he had with a bank staff person. The United
Nations (UN) in mid-2009 was struggling with its own sexual harassment complaints as many
women employees say the organization‘s current system for handling complaints is arbitrary,
unfair, and mired in bureaucracy. Sexual harassment cases at the UN can take years to
adjudicate, and accusers have no access to investigative reports. The UN plans to ―soon‖ make
changes to its internal justice system for handling harassment complaints; the UN aspires to
protect human rights around the world.

Corporate Social Responsibility

Some strategists agree with Ralph Nader, who proclaims that organizations have tremendous
social obligations. Nader points out, for example, that Exxon/Mobil has more assets than most
countries, and because of this firms have an obligation to help society cure its many ills. Other
people, however, agree with the economist Milton Friedman, who asserts that organizations have
no obligation to do any more for society than is legally required. Friedman may contend that it is
irresponsible for a firm to give monies to charity. Do you agree more with Nader or Friedman?
Surely we can all agree that the first social responsibility of any business must be to make
enough profit to cover the costs of the future because if this is not achieved, no other social
responsibility can be met. Indeed, no social need can be met by the firm if the firm fails.
Strategists should examine social problems in terms of potential costs and benefits to the firm,
and focus on social issues that could benefit the firm most. For example, should a firm avoid
laying off employees so as to protect the employees‘ livelihood, when that decision may force
the firm to liquidate?

Social Policy
Social policy concerns what responsibilities the firm has to employees, consumers,
environmentalists, minorities, communities, shareholders, and other groups. After decades of
debate, many firms still struggle to determine appropriate social policies. The impact of society

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on business and vice versa is becoming more pronounced each year. Corporate social policy
should be designed and articulated during strategy formulation, set and administered during
strategy implementation, and reaffirmed or changed during strategy evaluation.
In 2009, the most admired companies for social responsibility according to Fortune magazine
were as follows:
1. Anheuser-Busch
2. Marriott International
3. Integrys Energy Group
4. Walt Disney
5. Herman Miller
6. Edison
7. Starbucks
8. Steelcase
9. Union Pacific

10. Fortune Brands

Social Policies on Retirement

Some countries around the world are facing severe workforce shortages associated with their
aging populations. The percentage of person‘s age 65 or older exceeds 20 percent in Japan, Italy,
and Germany—and will reach 20 percent in 2018 in France. In 2036, the percentage of persons
age 65 or older will reach 20 percent in the United States and China. Unlike the United States,
Japan is reluctant to rely on large-scale immigration to bolster its workforce. Instead, Japan
provides incentives for its elderly to work until ages 65 to 75. Western European countries are
doing the opposite, providing incentives for its elderly to retire at ages 55 to 60. The
International Labor Organization says 71 percent of Japanese men ages 60 to 64 works,
compared to 57 percent of American men and just 17 percent of French men in the same age
group.

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 CHAPTER TWO

STRATEGY FORMULATION

2.1 Creating a Vision

2.1.1. Definition of Vision

Aspirations, expressed as strategic intent, should lead to an end; otherwise they would just be
castles in the air. That end is the vision of an organization. It is what the firm would ultimately
like to become. The strategic management effort begins with creation of organizational vision. In
other words vision statement writing is the first step in strategic management. At this step,
managers are required to envision where the organization should be headed in the long run and
understand how it might get there. By breaking out of the constraints of current organizational
circumstances they create or define a different future than the one anticipated.

Vision refers to category of intentions that are broad, all inclusive, and forward looking. It is the
ability to see things ahead of themselves. It represent mental picture. It is vivid dramatic and
complete picture of the shape of future things. It is a vividly descriptive image of what a
company wants to be or wants to be known for. Vision statement defines what the organization
what to be in the future. It answers the question ―What do we want to become/ what do we want
to be‖. McClendon and Quay (1988) have defined vision as ―a mental journey from known to
the unknown, creating the future on the basis of current facts, hopes, dreams, dangers (threats)
and opportunities. True visionary leaders tend to see opportunities before they see threats.‖
Vision is a necessary preproduction to success. However it is not a panacea for all ills.

Many organizations today develop a vision statement that answers the question, ―What do we
want to become?‖ Developing a vision statement is often considered the first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a
single sentience. For example, the vision statement of stokes Eye Clinic in Florence, South
Carolina, is ―Our vision is to take care of your vision.‖ The vision of College of Business and
Economics of the Ambo University is stated as ―We envision being the leading College of
Business and Economics in East Africa in education, research and consultancy and community
service and finally advance the welfare of the society.‖

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2.1.2. Benefits of vision

The Bible says that “Where there is no vision, the people perish”. The same holds true for
organization without vision statement. Good vision statement has many benefits to
organization. Some of these include:

 Good visions are inspiring and exhilarating

 Good visions help in the creation of a common identity and a shared sense of purpose
 Good visions are competitive, original and unique. They make sense in the market place
as they are practical
 Good visions foster risk-taking and experimentation
 Good visions foster long-term thinking.
 Good visions represent integrity; they are truly genuine and can be used for the benefit of
people.
 Visions represent a discontinuity, a step function and a jump ahead so that the company
knows what it is to be
 Effective vision statement link core value of organization

Dear students, to obtain the stated benefits vision of the organization has to be shared among
employees. It has to percolate down to the desk of every individual. To do so it has to be
communicated using all available means (magazines, notice board)

2.1.3. Characteristics of Visionary Leaders

Some of the characteristics of visionary leaders include:

1. Search for ideas, concepts, and ways of thinking until clear vision crystallizes;
2. Persuade employees to embrace the vision by setting an example of hard work;
3. Act in a supportive and expressive way that says, ― we are all in this together‖
4. Relate the vision to the cares and concerns of individuals;
5. Concentrate on those strengths within the organization that will ensure the success of the
vision;
6. Remain at the center of the vision, as its prime shaper;

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 7. Look for ways to develop further the corporate vision by taking note of changes inside
and outside the organization;
8. Measure the success of the organization in terms of its ability to fulfill the vision; and
9. Articulate the vision into an easy-to-grasp philosophy that integrates strategic direction
and cultural values.

2.2. Mission

2.2.1. Nature of Mission statement

A mission is defined as ―the fundamental purpose of the organization and its scope of operation‖
Mission statement clarify the purpose of an organization in a language that customers, managers
and employees will understand. Mission refers to the essential purpose of the organization
concentrating particularly why it is in existence, the nature of the business it is in, and the
customer it seeks to serve and satisfy. It defines the purpose or reason for the organization
existence. Mission – enduring statements of purpose - distinguish one business form other
similar firms. It defines scope of firms operations in product and market terms.

Mission embodies the business philosophy of strategic decision makers; implies the image the
company seeks to project; reflects the firm‘s self-concept; indicates the principal product or
service areas and primarily customer needs the company will attempt to satisfy. In short, the
mission describes the product, market, and technological areas of emphasis for the business. And
it does so in a way that reflects the values and priorities of strategic decision makers.

Mission has external orientation and relates the organization to the society in which it operates.
A mission statement helps the organization to link its activities to the needs of the society and
legitimize its existence. It defines the business which the company will undertake.
An organization‘s mission when expressed in managerially meaningful terms indicates exactly
what activities the organization intends to engage in now and in future. It suggests something
specific about what kind of organization it is and is to become. It depicts the organization‘s
business character and does so in ways that tend to distinguish the organization from other
organizations. Mission sets forth principles and conceptual foundation upon which the
organization reacts and the nature of the business in which it plans to participate.

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Organizational mission, defined properly, offers guidance to managers in developing sharply
focused, result-oriented objectives, strategies, and policies. Therefore, a detailed understanding
of organizational mission is the starting point for rational managerial action and for the design of
its strategies. Managerial effectiveness tends to begin with clarity of mission with an accurate,
carefully delineated concept of just what the organization is trying to do and why.

An organization‘s mission focuses on external, rather internal. In other wards mission has
external orientation and relate the organization to the society in which it operates. It link
organization with the need of society and legalize its existence. It answers the question what is
the business and how it goes there. Moreover, mission tangiblizes the vision – translate it into
reality. It addresses the issues more explicitly and serves to identify the care, the uniqueness of
the organization. Characteristically, it is a statement of attitude, outlook, and orientation rather
than of details and measurable targets.

Organizational mission encompasses the broad aims of the organization; it defines what for the
organization strives. Therefore, the process of defining mission for any organization can be best
understood by thinking about it at its inception. Truly speaking, an organization‘s mission lies in
the basic philosophy of those who create and manage the organization. Philosophy, in the
context of management of an organization, consists of an integrated set of assumptions and
beliefs about the way the things are, the purpose of the activities, and the way these should be.
These assumptions and beliefs of those who create an organization (owners) and those who
manage it (managers, specially the decision makers) become base for defining mission of the
organization. These assumptions and beliefs are sometimes explicit, and occasionally implicit, in
the minds of the decision makers. The philosophy of a person has its origin in two premises-fact
premises and value premises. Fact premises represent our descriptive view of how the world
behaves. They are drawn from research findings and our experiences. Value premises represent
our view of the desirability of certain goals and activities.

Often the mission is written in terms of the general set of products and the services the
organization provides and the markets as well as clients it serves. Such definition, of course,
depends on the scope of the organization and its capacity to serve the society. Definition of a
mission must also a due regard for the needs and interests of the organization‘s stakeholders,

26
especially major clients. A mission addresses the basic question that faces all strategists: ―What
is our business?‖ A clear mission statement describes the values and priorities of an organization.
Developing a mission statement compels strategists to think about the nature and scope of
present operations and to assess the potential attractiveness of future markets and activities.

A mission statement broadly charts the future direction of an organization. For example, the
mission of Kellogg Company is ―to be the world‘s leading producer of ready-to-eat cereal
products and to manufacture frozen pies and waffles, toaster pastries, soups, and other
convenient foods.‖ The mission of College of Business and Economics of the Ambo University
is declared as ― Our efforts in the College of Business and Economics is to produce competent
and determined human resource through programs at graduate, undergraduate, and short term
training programs; conducting research and consultancy and rendering community service to
public, private (profit making) and non-profit organizations, so that beneficiaries could receive
superior value products and services and thereby enriches our staff and partners to share our
success.‖

2.2.2. FUNCTIONS OF MISSION

According to King and Cleland (quoted in David Fred, 2005) defining mission statement for an
organization serves the following function (benefits).

1. To ensure unanimity of purpose within the organization.

2. To provide a basis for motivating the use of the organization‘s resources.
3. To develop a basis, or standard, for allocating organizational resources.
4. Provides the boarding for strategy formulation. It helps to focus on the real strategies and
secondary issues. It provide guidance for strategy making
5. Mission statement outlines norms of individual behavior. It provides ethical standard for
organization
6. To establish a general tone or organizational climate, for example, to suggest a
businesslike operation.
7. To serve as a focal point for those who can identify with the organization‘s purpose and
direction, and to deter those who cannot from participating further in the organization‘s
activities.

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 8. To facilitate the translation of objectives and goals into a work structure involving the
assignment of tasks to responsible elements within the organization.
9. To specify organizational purposes and the translation of these purposes into goals in
such a way that cost, time, and performance parameters can be assessed and controlled.
10. Formally acknowledge responsibilities toward various stakeholders and set standards for
organizational performance along a stated dimension. Stakeholders are interested parties
which affects and affected by organization. Stakeholder include; shareholders, customers,
staff, suppliers, market intermediaries, community, government and etc
11. Mission statement acts as touch stone for decision making. It provides core principles
for decision making

2.2.3. Characteristic of good mission

Every organization has mission either defined explicitly or may be deduced from the actions of
its top management. For a large organization, where its members do not have face-to-face
contact, explicit mission statement is desirable as it serves the purpose of communicating to the
members about the corporate philosophy, identity, character, and image which govern their
behavior in the organization. Furthermore, section of the society dealing with the organization
knows well in advance as how to, interact with the organization. Therefore, while framing the
mission statement, following points should be taken into consideration so that it serves the
purpose for which it is prepared:

 It should be feasible. Followers should not fill it is impossible. It should be neither too
high to be unachievable, nor too low to de-motivate the people for work.
 It should be precise – not to narrow and not to broad. It should be precise but self-
explanatory, neither too narrow so as to restrict the organization‘s activities, nor too
broad to make itself meaningless
 It should be clear, both in terms of intentions and words used;– to lead to action
 It should be motivating – for employees , customers and society
 It should be distinctive (unique). It should be distinctive, both in terms of the
organization‘s contributions to the society and how these contributions can be made.
 It should indicate major components of strategy- shows major strategies adopted

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  It should indicate how objectives are to be accomplished.- give clue how to accomplish
objective
Most practitioners and academicians of strategic management feel that an effective mission
statement exhibits nine characteristics or components. These are:

1. Customers – Who are the firm‘s customers?

2. Products or services – What are the firm‘s major products or services?
3. Markets – Geographically, where does the firm compete?
4. Technology – Is the firm technologically current?
5. Concern for survival, growth, and profitability – Is the firm committed to growth and
financial soundness?
6. Philosophy – What are the basic beliefs, values, aspirations, and ethical priorities of the
firm?
7. Self-concept – What is the firm‘s distinctive competence or major competitive
advantage?
8. Concern for public image – Is the firm responsive to social, community, and
environmental concerns?
9. Concern for employees – Are employees a valuable, asset of the firm?

2.2.4. Formulating Mission Statement

The process of defining the mission for a specific business can perhaps be best understood by
thinking about a firm at its inception. The typical business organization begins with the beliefs,
desires, and aspirations of a single entrepreneur. The sense of mission for such an owner-
manager is usually based on several fundamental elements. Among others it includes:

1. Belief that the product or service can provide benefits at least equal to its price.
2. Belief that the product or service can satisfy a customer need currently not met
adequately for specific market segments.
3. Belief that the technology to be used in production will provide a product or service that
is cost and quality competitive.

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 4. Belief that with hard work and the support of others the business can do better than just
survive, it can grow and be profitable.
5. Belief that the management philosophy of the business will result in a favorable public
image and will provide financial and psychological rewards for those willing to invest
their labor and money in helping the firm to succeed.
6. Belief that the entrepreneur‘s self-concept of the business can be communicated to and
adopted by employees and stockholders.

As the business grows or is forced by competitive pressures to alter its

product/market/technology, redefining the company mission may be necessary. If so, the revised
mission statement will not reflect the same set of elements as the original. It will state the basic
type of product or service to be offered, the primary markets or customer groups to be served, the
technology to be used in production or delivery; the fundamental concern for survival through
growth and profitability; the managerial philosophy of the firm; the public image sought; and the
self-concept those affiliated with it should have of the firm.

2.3. Goals

2.3.1 Definition of organizational goals

Every organization has some function to perform and some contribution to make to the
environment of which it is a part. The function of the business enterprise may be seen as the
creation and/or supply of goods and services. It may also be to provide a source of employment
and income for prospective applicants. All these involve bringing together the factors of
production in appropriate units of organization and their successful mix and direction in order to
create value added outcome.

Apart from performing some function, all organizations have some incentive for their existence
and for their operations. Goals of an organization refer to a general statement of direction inline
with the mission. Goal could be quantitative and qualitative in nature. The goals of an
organization are the reason for its existence. The activities of an organization are directed to the
achievement of its goals. A goal is a future expectation. It is something the organization is trying
to accomplish. The meaning of a goal is however subject to many interpretations. It can be used
in a very broad sense to refer to the overall purpose or general objective of an organization, for

30
example, to produce pencils. A goal may refer to more specific desired accomplishments for
example to produce and sell a given number of HB pencils within a given period of time.

The goals of an organization will determine the nature of its inputs and outputs, the series of
activities through which the outputs are achieved and interactions with its external environment.
The extent to which an organization is successful in attaining its goals is a basis for the
evaluation of organizational performance and effectiveness.

2.3.2. FUNCTIONS OF GOALS

The concept of organizational goals serves a number of important functions.

 Goals provide a standard of performance. They focus attention on the activities of the
organization and the direction of the efforts of its members.
 Goals provide a basis for planning and management control related to the activities of the
organization.
 Goals provide guidelines for decision making and justification for actions taken. They
reduce uncertainty in decision making and give defense against possible criticism.
 Goals influence the structure of the organization and help determine the nature of
technology employed. The manner in which the organization is structured will affect
what it will attempt to achieve.
 Goals help to develop commitment of individuals and groups to the activities of the
organization. They focus attention on purposeful behavior and provide a basis for
motivation and reward systems.
 Goals give an indication of what the organization is really like, its true nature and
character, both for members and for people outside of the organization.
 Goals serve as a basis for the evaluation of change and organization development.

Goals are more precise as compared to mission and used to specify the end results which an
organization wants to achieve. We can define goal as the intended end result that an organization
desires to achieve over varying periods of time. It could be defined as a general statement of
direction line with the mission. Because of time variation, goals may be specified in different
ways in which long-term goals are supported by short-term goals. For example, Goal of College

31
of Business and Economics of the Ambo University is to produce capable human resources who
would be able help to promote development in the Ethiopia.

2.3.3. Features of Goals

1. Each organization, or group of individuals, has some goals. In fact, organizations or

groups are created basically for certain goals. Members in the organization or group try to
achieve these goals.

2. Goals may be broad or they may be specifically mentioned. They may pertain to a wide
or narrow part of the organization. They may be set either for the long term or for the
short term. For example, the basic goal of a business organization may be to earn profit.
This may be quite a broad goal. In order to achieve this broad goal, some specific goal
may be set, for example, how much profit and in which period.

3. Goals have hierarchy. At the top level, it may be broad organizational purpose which can
be broken into specific goals at the departmental level. From departmental goals, units of
the department may derive their own goals. This is possible because organization is
created by combining people into sections, departments, divisions, etc. All of them try to
achieve organizational goals and, at each level a unit may contribute to the fulfillment of
tasks assigned to it. Thus, a hierarchy of goals is created

4. An organization may have multiple goals. For example, to continue to control costs and
improve productivity very rigorously; to build up management skills for future growth;
to utilize R & D more effectively in creating new business opportunities; to build a
strong Board balancing the advantages of decentralizing profit responsibility against the
advantages of centralized controls on personnel, finance, and technology; to
communicate more openly and purposefully, internally as well as externally; and to
develop succession to the Board and to Chairmanship.

5. Goals address financial and non –financial issue. Organization should have to balance
financial and non-financial issues.

6. Goal facilitate reasoned trade –offs. Organizational goals concerned with prioritization of
ends to be achieved. Thus, there is trade-off in setting organizational goals.

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 7. Organizational calls for stretching the limits. Organizational goals need to set by
stretching the limit to enhance organizational motivation. In other wards, organizational
goals should be challenging and acceptable to the staff. Easily achievable and over
stretched goals do not motivate staff, thus, reduce organizational productivity.

8. Organizational goals have social sanction, that is, they are created within the social
norms. Since organizations are social units, their goals must conform to the general needs
of the society. Various restrictions on organizational goals are put through social norms,
rules and customs.

9. Goals may be clearly defined or these may not be clear and have to be interpreted by the
behavior of organizational members, particularly those at top level. However, clearly
defined goals provide clear direction for managerial action.

10. Organizational goals can be changed; old goals may be replaced by new ones. It is
possible because organizations are free to set their goals within the overall social norms.
Since goals are formulated keeping in view the environmental factors and internal
conditions, any change in these may result into change in goals.

11. Organizational goals cut across functional areas. Goals apply to entire organization.
Goals act as a coordinating and integrating forces in organization. Poorly designed goals
enhance organizational conflict.

2.4. Objectives

The goals of the organization are usually translated into objectives. Objectives set out more
specifically the goals of the organization, the aims to be achieved and the desired end-results.
The objectives of an organization are related to the input-conversation-outputs cycle when
viewed from the systems theoretical perspective. In order to achieve its objectives and satisfy its
goals, the organization takes input from the environment through series of activities, transforms
these inputs into outputs and returns them to the environment as inputs to other systems. The
organization operates within a dynamic setting and success in achieving its goals will be
influenced by a multiplicity of interactions with the environment.

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Objectives are narrower than goals and are of a shorter time. Objectives are an essential part of
the decision-making process involving future courses of action. Objectives may be set out either
in general terms or in more specific terms.

General objectives are determined by top management. Specific objectives are formulated within
the scope of general objectives and usually have more defined areas of application and time
limits.

Objectives may be just implicit but the formal explicit definition of objectives will help highlight
the activities which the organization needs to undertake and the comparative importance of its
various functions. An explicit statement of objectives may assist communication and reduce
misunderstanding and provide more meaningful criteria for evaluation organizational
performance.

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its
basic mission. Objectives are essential for organizational success because they state direction;
aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for
effective planning, organizing, motivating, and controlling activities. Objectives should be
challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives
should be established for the overall company and for each division.

Organizations should set long term and annual objectives. Long term objectives are ends that are
to be achieved in the long range. They should be measurable, challenging, realistic, consistent,
and prioritized. Annual objectives are short-term milestones that organizations must achieve to
reach long-term objectives. Like long-term objectives, annual objectives should be measurable,
challenging, realistic, consistent, and prioritized. They should be established at the corporate,
divisional, and functional levels in a large organization. Annual objectives should be stated in
terms of management, marketing, finance/accounting, production/operations, research and
development, and management information systems (MIS) accomplishments. A set of annual
objectives is need for each long-term objective. Annual objectives are especially important in
strategy implementation, whereas long-term objectives are particularly important in strategy
formulation. Annual objectives represent the basis for allocating resources.

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Objective are statements of organization targets or the end results that administrator (managers)
seek to achieve. They are the ends, toward which activity of the organization is aimed. They
represent not only the end point of planning but also the ends toward which other management
functions (organizing, setting, leading and controlling) are aimed.

Organizational objectives reflect management responsibilities and the position in the

organizational structure. At the top-level management, objectives are strategic and related to
long-large planning issues, where as tactical and operational objectives are related to medium
and short large plans respectively.
Objectives are concrete, quantified, or at as least a more precise statement in line with the goal.
They are operational definition of goals and help managers to take specific action. They help to
accomplish goals. Organizations have many objectives than goals. Objectives of the
organizations have to be satisfy the SMARTER (S= Specific, M= Measurable, A= Achievable,
R= Realistic, T= Time bound, E= Enhanceable, R= Rewarding) principle.
In addition the aforementioned, objectives provides the following benefits to organizations

 Defines the role of the organization in the larger environment. It defies what
organization intends to do.
 Set the standard for performance monitoring and remedial action
 Serve to link vision, mission and goals
 Reduce conflict. They help to coordinate decisions and decisions makers
 Objectives provide coherence. Objectives are not set irrespective of each other;
they are made in relation to each other to form coherent whole. They complement
each other.
 Objectives acknowledge constraints. In setting objectives organizations take into
account existing and future internal and external constraints
2.5. Policies

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While objectives refer what is to be done, polices focus on how organizational objectives will be
achieved. Polices provide a general guideline to action. It is a framework for managers to follow
in decision-making and handling problem situational. Polices define an area within which a
decision is to be made and ensure that the decision will be consistent with, and contribute to an
objective. Policies are guides to decision making and address repetitive or recurring situations.
Policies are the means by which annual objectives will be achieved. They are most often stated
in terms of management, marketing, finance/accounting, production/operations, research and
development, and computer information systems activities.

Policies can be established at the corporate level and apply to an entire organization at the
divisional level and apply to a single division or at the functional level and apply to particular
operational activities or departments. Policies, like annual objectives, are especially important in
strategy implementation because they outline organizations expectations of its employees and
managers. Policies allow consistency and coordination within and between organizational
departments.

Polices should be clear and understandable, stable over time and communicated to every one
involved. They may be stated in positive and negative terms. They must also allow for some
discretion. Other wise, they would be rules. In other words polices should not interpreted as a
kind of ―ten commandments‖ which do not leave room for discretion. This does not mean also
polices are limit less. That is policies encourage discretion and initiative within limit.

Policy provides guiding principles of areas of decision making and delegation. Some policy
decisions are directly influenced by external factors. For example, government legislation on
racial or sexual discrimination affects decision making. Thus, actual implementation of policies
is somehow difficult. For instance, filling top vacancy from internal employee where the
organization has no adequately qualified and experienced staff to fill senior organizational
positions.

2.6. Procedures
Whereas polices are general framework to attain the organizational objectives, procedures are
specific steps required to achieve goals. Procedures show chronological sequences of required
action (show sequence of activities). They guides to action, rather than to thinking and they

36
detail the exact manner in which certain activities must be accomplished. They are found in all
functions numerous at the lower level and help in the implementation of polices (out line the how
of the decision). They cut across department when many people in the functions are involved in
the task. Unlike polices, they limit creativity and initiatives. Well-established procedures
provide specific instructions in handling organizational operations.
2.7. Rules
A rule is a statement that tends to restrict actions or prescribe specific activities with no
discretion. In other words a rule is a specification for actions that must be taken, or must note be
taken in particular circumstances. They spell out specific required actions or no actions, allowing
no discretion. That is they creativity and initiative. They are usually the simplest type of plan.
They are designed to be clear and unambiguous.

2.8. Program. Program encompasses a complex whole of goals police, rules, task,
recourse required, etc. that are desired to chart a desired course of action.
2.9. Budget. Budget refers to a statement of expected results expressed in numerical
terms. It relates to a specific time span in the future. It is used for allocation and
control of resources. It also called financial plan/profit. It address issues in very
detail manner, and limit freedom
Chapter Summary

Strategic management effort begins with creation of vision of organization. Vision denotes
broader intension the organization. It defines what the organization wants to become in the
future. After defining the vision of organization, mission statement of the organization is
written. Mission states the purpose for which the organization exists and the scope its operation.
It answers the question ―what is our business?‖ It provides many benefits and has many features.
Thus, strategists have to aware of the features and benefits of mission statement while writing
organizational mission.

Goals refer to general statements inline with the mission of the organization. Among others goals
of organization provide a standard for measuring performance, has cross-functional effect and
address financial and non-financial issues of the organization. Objectives of organization
translate goals into concert desired ends. They are narrower and are of short time than goals.

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Organizational policies provide general guideline for action and they are means by which annual
objectives are achieved. Procedures also provide direction to achieve desired goals. Unlike
policies, procedures show specific steps required to achieve goals, and limit discretion.

Plan, rules, program and budget are the other elements of strategic planning and management.
Rules spell out dos and do not dos. Program consists of projects, policies, tasks, resources
required to chart a desired course of action. Budget is a detailed document and specifies the
allocation of resources.

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 Chapter Three

3.1. External Environment Analysis

External environment comprises all factors external to the firm that can lead to opportunities and
threats. External trends and events significantly affect all products, services, markets, and
organizations in the world. Changes in external forces translate into changes in consumer
demand for both industrial and consumer products and services. External forces affect the types
of products developed, the nature of positioning and market segmentation strategies, the type of
services offered, and the choice of businesses to acquire or sell. External forces directly affect
both suppliers and distributors. Identifying and evaluating external opportunities and threats
enables organizations to develop a clear mission, to design strategies to achieve long-term
objectives, and to develop policies to achieve annual objectives.

Opportunities and threats are largely beyond the control of a single organization – thus the word
external. The wireless revolution, biotechnology, population shifts, changing work values and
attitudes, space exploration, recyclable packages, and increased completion from foreign
companies are examples of opportunities or threats for companies. These types of changes are
creating a different type of consumer and consequently a need for different types of products,
services, and strategies. Many companies in many industries face the severe external threat of
online sales capturing increasing market share in their industry. Other opportunities and threats
may threats include the passage of a law, the introduction of a new product by a competitor, a
national catastrophe, or the declining value of the dollar. A competitor‘s strength could be a
threat. Unrest in the Middle East, rising energy costs, or the war against terrorism could represent
an opportunity or a threat.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage
of external opportunities and to avoid or reduce the impact of external threats. For this reason,
identifying, monitoring, and evaluating external opportunities and threats are essential for
success. This process of conducting research and gathering and assimilating external information
is sometimes called environmental scanning or industry analysis. Lobbying is one activity that
some organizations utilize to influence external opportunities and threats.

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3.1.1. The Nature of an External Audit
The purpose of an external auditis to develop a finite list of opportunities that could benefit a
firm and threats that should be avoided. As the term finite suggests, the external audit is not
aimed at developing an exhaustive list of every possible factor that could influence the business;
rather, it is aimed at identifying key variables that offer actionable responses. Firms should be
able to respond either offensively or defensively to the factors by formulating strategies that
take advantage of external opportunities or that minimize the impact of potential threats.
To perform an external audit, a company first must gather competitive intelligence and
information about economic, social, cultural, demographic, environmental, political,
governmental, legal, and technological trends. Individuals can be asked to monitor various
sources of information, such as key magazines, trade journals, and newspapers.

External environment of organization can be divided into the general environment and task
environment further. The general environment consist political environment, economic
environment, social and cultural environment, and technological environment (PEST). The task
environment constitute factors that are closer to organizational boundary such as; competitors,
suppliers, customers (buyers), potential substitute and new entrants. In the section only PEST
variables will present. The task environment will be discussed in the industry analysis section.

3.1.2. The General Environment

The general environment of organization is also called macro or mega environment. As

mentioned earlier, the PEST variables constitute the macro environment of the organizations.
Each of these variables is discussed briefly here under.
A. Political, Governmental, and Legal Forces
Successful strategic management depends on thorough evaluation of the political circumstances
that will confront with the organization. The legal and regulatory policies of the organizations‘
operation are defined by political factors.
Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers,
employers, and customers of organizations. Local, state, and federal laws, regulatory agencies,
and special interest groups can have a major impact on the strategies of small, large, for-profit,
and non profit organizations. Some laws and regulations could restrict the potential profits of

40
business organizations. These include: tax laws, minimum wage legislation, pollution and pricing
policies, administrative laws and may other political actions aimed at protecting employees,
customers, the general public, and the environment. On the other hand, there are some political
actions that are designed to benefit and protect organizations. These include patent laws,
government subsidies, and product research grants. In short political, governmental, and legal
factors, therefore, can represent key opportunities or threats for both small and large
organizations. Thus, those political factors that either benefit or limit the organization need to be
critically assessed.

The increasing global interdependence among economic, markets, governments, and

organizations makes it imperative that firms consider the possible impact of political variables on
the formulation and implementation of competitive strategies. For example, the United States,
Japan, and Europe are critical of the Chinese government for its fixed exchange rate, which
analysts contend takes job from other countries and artificially cuts the cost of China‘s exports
by significantly undervaluing its currency.

Increasing global competition accents the need for accurate political, governmental, and legal
forecasts. Many strategists will have to become familiar with political systems in Europe, Africa,
and Asia and with trading currency futures. East Asian countries already have become world
leaders in labor – intensive industries. A world market has emerged from what previously was a
multitude of distinct national markets, and the climate for international business today is much
more favorable than yesterday. Mass communication and high technology are creating similar
patterns of consumption in diverse cultures worldwide. This means that many companies may
find it difficult to survive by relying solely on domestic markets.

Political action can bring about a substantial impact on the external environment of firms in the
areas of supplier function, customer function and competitive function among others.

i. Supplier function: Government decisions regarding the accessibility of private

businesses to government-owned natural resources and national stockpiles of agricultural
products will profoundly affect the viability of the strategies of the firms.
ii. Customer Function:Government demand for products and services can create, sustain,
enhance, or eliminate many market opportunities. For example, in the same way that the

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 Kennedy administration‘s emphasis on landing a man on the moon spawned a demand
for thousands of new products; the carter administration‘s emphasis on developing
synthetic fuels created a demand for new skills, technologies and products; and the
Reagan administration‘s strategic defense initiative (the ―star Wars‖ defense) sharply
accelerated the development of faster technologies.
iii. Competitive Function:The government can operate as an almost unbeatable competitor
in the market place. Thus, knowledge of government‘s strategies gained through
assessment of the external environment can help a firm avoid unfavorable confrontation
with the government as competitor.
B. Economic Factor
Each organization must consider economic trends in the segments that affect the organization. In
particular the economic assessment must address the overall economic forecast for the planning
period and the likely funding stream that will be available to the organization through the budget
or other sources. Moreover, all of the national forces that can affect the economic well being of
the organization should be thoroughly analyzed. For instance, the availability of credit, the level
of disposable income, the prosperity of people to spend, interest rates, inflation rates,
devaluation/price controls, unemployment levels, increasing numbers of two-income households,
and other trends in the economy.
Economic factors have a direct impact on the potential attractiveness of various strategies. For
example, when interest rates rise, funds needed for capital expansion become more costly or
unavailable. Also, when interest rates rise, discretionary income declines, the demand for
discretionary goods falls. When stock prices increase, the desirability of equity as a source of
capital for market development increases. Additionally, when the market rises, consumer and
business wealth expands. Trends in the dollar‘s value have significant and unequal effects on
companies in different industries and in different locations. For example, the pharmaceutical,
tourism, entertainment, motor vehicle, aerospace, and forest products industries benefit greatly
when the dollar falls against the yen and euro.

C. Social and Cultural Forces

A number of social factors can greatly influence the future of an organization. To mention some
of them, they include the beliefs, values, attitudes, opinions, and life styles of persons in the

42
organization‘s external environment, as developed from cultural, demographic, ecological,
religious and ethnic conditioning. Social, cultural, demographic, and environmental changes
have a major impact upon virtually all products, services, markets, and customers.

Small, large, for-profit and non-profit organizations in all industries are being staggered and
challenged by the opportunities and threats arising from changes in social, cultural, demographic,
and environmental variables. As social attitudes change so too does the demand for various
types of clothing, books, and leisure activities and so on.

D. Technological Forces

Revolutionary technological changes and discoveries are having a dramatic impact on

organizations. Superconductivity advancements alone, which increase the power of electrical
products by lowering resistance to current, are revolutionizing business operations, especially in
the transportation, utility, healthcare, electrical, and computer industries.

The Internet is acting as a national and even global economic engine that is spurring
productivity, a critical factor in a country‘s ability to improve living standards; and it is saving
companies billions of dollars in distribution and transaction costs from direct sales to self-service
systems.

The Internet is changing the very nature of opportunities and threats by altering the life cycles of
products, increasing the speed of distribution, creating new products and services, erasing
limitations of traditional geographic markets, and changing the historical trade-off between
production standardization and flexibility. The Internet is altering economies of scale, changing
entry barriers, and redefining the relationship between industries and various suppliers, creditors,
customers, and competitors.

Technological forces represent major opportunities and threats that must be considered in
formulating strategies. Technological advancements can dramatically affect organizations‘
products, services, markets, suppliers, distributors, competitors, customers, manufacturing
processes, marketing practices, and competitive position. Technological advancements can create
new markets, result in a proliferation of new and improved products, change the relative
competitive cost positions in an industry, and render existing products and services obsolete.

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Technological changes can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in changing values and
expectations of employees, managers, and customers. Technological advancements can create
new competitive advantages that are more powerful than existing advantages. No company or
industry today is insulated against emerging technological developments. In high-tech industries,
identification and evaluation of key technological opportunities and threats can be the most
important part of the external strategic-management audit.

Organizations that traditionally have limited technology expenditures to what they can fun after
meeting marketing and financial requirements urgently need a reversal in thinking. The pace of
technological change is increasing and literally wiping out businesses every day. An emerging
consensus holds that technology management is one of the key responsibilities of strategists.
Firms should pursue strategies that take advantage of technological opportunities to achieve
sustainable, competitive advantages in the marketplace.

3.1.3. Sources of External Information

1. Information is available to organizations from both published and unpublished sources.
a. Unpublished sources include customer surveys, market research, speeches at
professional and shareholders‘ meetings, television programs, interviews, and
conversations with stakeholders.
b. Published sources of strategic information include periodicals, journals, reports,
government documents, abstracts, books, directories, news papers, and manuals.
2. The Internet has made it easier for firms to gather, assimilate, and evaluate information.
There are many excellent Web sites for gathering strategic information, some of the are:
i. http://marketwatch.multexinvestor.com
ii. http://moneycentral.msn.com
iii. http://finance.yahoo.com
iv. www.clearstation.com
v. https://us.etrade.com/e/t/invest/markets
vi. www.hoovers.com

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3.1.4. Analysis of the Industry (Task Environment)

3.1.4.1. Nature and Degree of Competition

The essence of strategy formulation is coping with competition. Yet it is easy to view
competition too narrowly and too pessimistically. While one sometimes hears executives
complaining to the contrary, intense competition in an industry is neither coincidence nor bad
luck. Industry analysis is concerned with the true nature of competition in an industry.

The nature and degree of competition nevertheless determines the strategy an organization can
adopt. Hence managers of strategic organizations must gauge the level of competition before
embarking on strategic moves.

3.1.4.2. How Competitive Forces Shape Strategy

In the fight for market share, competition is not manifested only in the other players. Rather,
competition in an industry is rooted in its underlying economics, and competitive forces exists
that go well beyond the established combatants in a particular industry. Customers, suppliers,
potential entrants, and substitute products are all competitors that may be more or less prominent
or active depending on the industry.

The collective strength of these forces determines the ultimate profit potential of an industry. It
ranges from intense in industries like tires, metal cans, and steel, where no company earns
spectacular returns on investment, to mild in industries like oil-field services and equipment, soft
drinks, and toiletries, where is room for quite high returns.

In ―perfectly competitive‖ industry, jockeying for position is unbridled and entry to the industry
is also very easy. This kind of industry structure, of course, offers the worst prospect for long-run
profitability. The weaker the forces collectively, however, the greater the opportunity for
superior performance.

Whatever their collective strength, the corporate strategist‘s goal is to find a position in the
industry where his or her company can best defend itself against these forces or can influence
them in its favor. The collective strength of the forces may be painfully apparent to all the
antagonists; but to cope with them, the strategist must delve below the surface and analyze the

45
sources of competition. For example, what makes the industry vulnerable to entry? What
determines the bargaining power of suppliers?

Knowledge of these underlying sources of competitive pressure provides the groundwork for a
strategic agenda of action.

3.1. 5. Competitive analysis: Porter’s five forces model

As illustrated in Figure 4-1, Porter‘s five-force modelof competitive analysis is a widely used
approach for developing strategies in many industries. The intensity of competition among firms
varies widely across industries. Rivalry among existing firms is severe, new rivals can enter the
industry with relative ease, and both suppliers and customers can exercise considerable
bargaining leverage. According to Porter, the nature of competitiveness in a given industry can
be viewed as a composite of five forces:

An industry can be defined as a group of companies offering products or services that are close
substitutes for each other. Close substitutes are products or services that satisfy the same basic
consumer needs. The task facing managers is to analyze competitive forces in an industry‘s
environment in order to identify the opportunities and threats confronting a company. Michael E.
Porter has developed a framework that helps managers in this analysis. He has shown that the
intensity of rivalry among existing firms, the threat of new entrants, the power of
customers/clients (buyers), the potential for substitutes, and the power of suppliers all combine to
drive competition in a given industry. Porter proposes that one can determine the strategic
profitability of an industry by examining five basic competitive forces. Porter contends that the
collective strength of these forces determines the ultimate profit potential in the industry, where
profit potential is measured in terms of long-run return on invested capital. According to Porter,
a corporation must carefully monitor its environment to determine the impact of these five
factors on the firm's potential for success.
Figure 4.1 depicts the five forces that determine the extent of competition in an industry. The
rationale behind this model is that industry profitability is not determined by what the product
looks like, nor whether it embodies high or low technology: it is determined by the structure of
the industry.
1. Rivalry among competing firms
2. Potential entry of new competitors
46
 3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers

Potential entrants

Industry Competitors

Suppliers
Buyers
Rivalry among Existing firms

Substitutes

Figure 4.1 The Five Forces model of competition

1. Rivalry among competing firms

This is the most obvious form of competition: the head –to-head rivalry between firms making
similar products and selling them in the same market. The extent of competition may take any
from war like, better or throat cutting, to polite in gentlemanly it may be governed by unwritten
‗rules‘: gentlemen‘s agreements which help the industry to avoid the damage that excessive
price-cutting, advertising and promotion expenses can inflict on profits. The strategist must be
well aware of the extent and nature of direct competition in the industry. She/he must know the
bases of such competition and the possible future direction.

If this rivalry is weak, companies have an opportunity to raise prices and earn greater profits. If
rivalry is strong, significant price competition, including price wars, may result. Price

47
competition limits profitability by reducing the margins that can be earned on sales. Thus,
intense rivalry among established companies constitutes a strong threat to profitability.
Competition can be restricted to one dimension (e.g. Price) or many (e.g. service, product
quality, retail outlets, advertising, product innovation, credit).
Rivalry is usually intense where some of the following conditions are in evidence:

1. As the number of competitors increases and as they become more equal in size and
capability. The number and size distribution of companies in an industry refers to
competitive structure. Structures vary from fragmented to consolidated and have different
implications for rivalry. A fragmented industry contains a large number of small or
medium-sized companies, none of which is in a position to dominate the industry.
2. When competitors are tempted by industry conditions to use price cuts or other
competitive weapons to boost unit volume.
3. When there exists or development of global customers
4. When there is high fixed cost and the company enhanced capacity utilization rapidly (
enable to cut price)
5. When competitors‘ products and services are so similar that customers incur low costs in
switching from one brand to another(lack of differentiation or switching costs)
6. Rivalry becomes more volatile and unpredictable the more diverse competitors are in
terms of their strategy, personalities, corporate priorities, resources and countries of
origin.
7. When strong companies outside the industry acquire weak firms in the industry and
launch aggressive, well-funded moves to transform the newly acquired competitor into a
major market contender.
8. When there are high exit barriers. When it costs more to get out of a business than to stay
in and compete. That is even though loss exist company may persist to exist because of
high exist cost. Exit barriers are economic, strategic, and emotional factors that keep
companies in an industry even when returns are low. If exit barriers are high, companies
can become locked into an unprofitable industry in which overall demand is static or
declining. Excess productive capacity can result. In turn, excess capacity tends to lead to
intensified price competition with companies cutting prices in an attempt to obtain the
orders needed to utilize their idle capacity. Common exit barriers include:

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 1) Investments in plant and equipment that have no alternative uses and cannot be
sold off. If the company wishes to leave the industry, it has to write off the book
value of these assets.
2) High fixed costs of exit, such as severance pay to workers who are being made
redundant.
3) Emotional attachments to an industry, as when a company is unwilling to exit
from its original industry for sentimental reasons.
4) Economic dependence on the industry, as when a company is not diversified and
so relies on the industry for its income.

2. Potential Entry to New Competitors

New entrants are companies that are not currently competing in an industry but have the
capability to do so if they choose. Incumbent companies (those already operating in an industry)
try to discourage potential competitors from entering the industry, since the more companies
enter, the more difficult it becomes for established companies to hold their share of the market
and to generate profits. Thus, a high risk of entry by potential competitors represents a threat to
the profitability of established companies. This might be because of the fact that, new entrants
typically have substantial resources, pursue actions that increase industry capacity, and, attempt
to increase their market shares. As a consequence, prices often go down, incumbents' costs may
become inflated, and incumbents' profits may therefore go down. For these reasons, new entrants
must be viewed as threats to incumbents.

The strength of the competitive force of potential rivals is largely a function of the height of
barriers to entry. Barriers to entry are factors that make it costly for companies to enter an
industry. The greater the costs that potential competitors must bear to enter an industry, the
greater are the barriers to entry.

If it is easy to get into an industry then, as soon as profits look attractive, new firms will enter.
New entrants to industry increase industry competition. If demand for the industry‘s products
does not rise to match the increased capacity that entry has caused then prices, and with them
profits, are likely to fall. So the threat of entry places an upper limit on an industry‘s profitability.
The most common barriers to entry are;

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1. Economies of scale. These are cost advantages that accrue through having large –
scale operations. Economies of scale are the cost advantages associated with large
company size. Sources of scale economies include cost reductions gained through
mass-producing a standardized output, discounts on bulk purchases of raw material
inputs and component parts, the advantages gained by spreading fixed costs over a
large production volume, and economies of scale in advertising.
2. Brand preferences and customer loyalty making it difficult for a new entrant to pries
customers away from their existing suppliers. Brand loyalty is buyers' preference for
the products of incumbent companies.
3. Capital requirements. Just the sheer up-front costs of entering the industry act as a
deterrent (e.g. aerospace, oil refining). Large dose of capital may be required at
various stages and hence it is a patent early barrier. Global movement of capital,
however, has increased firms access to investment capital.
4. Cost disadvantages independent of size. Existing firms may enjoy some advantage
irrespective to the scale of operation. Sometimes incumbent companies have an
absolute cost advantage relative to potential entrants. Absolute cost advantages can
arise from three main sources: (1) superior production operations, due to past experi-
ence, patents, or secret processes; (2) control of particular inputs required for pro-
duction, such as labor, materials, equipment, or management skills; and (3) access to
cheaper funds because existing companies represent lower risks than companies that
are not yet established. If incumbent companies have an absolute cost advantage, the
threat of entry decreases
5. Access to distribution channels. If you cannot reach the customer as effectively as the
incumbent firms then it will not be your products or services that are sold.
Cooperation and active support of distribution channel is very essential for success. It
would be difficult for new entry to secure it.
6. Product differentiation .It focuses on making new product or influence customer to
perceive the product unique. It might include: Product design, market approach
(brand quality) and product difference. It creates barriers to new entrants because it
forces them to spend heavily to overcome existing customer loyalties.

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 7. Government actions and policies. Government policy create major entry barrier. For
example Airline service and Satellite transmission are monopolized by government
Environmental policies also create entry barrier.
3. Pressure from Substitute Products

All firms in an industry are competing, in a broad sense, with industries producing substitute
products. For our purposes a substitute is something that meets the same needs as the product
produced in the industry. Substitutes are products / services serving similar purpose for instance,
e-mail, post and fax. It affects firm‘s profitability, (price difference). If the substitute becomes
more attractive in terms of price, performance or both, then some buyers will be tempted to move
their custom away from the firms in the industry. If substitutes pose a credible threat, then, firms
in the industry will be prevented from raising their prices or from failing to develop and improve
their products/services. The key to identifying substitutes is to look for products that perform the
same function as those produced by the established industry, even though they may not appear to
be obvious substitutes. In particular, firms should pay attention to products whose price-
performance trade-offs with the industry's products are improving. Higher industry profits
increase the chance that substitutes will be sought. The problem of substitution can be seen in the
security guard industry. Electronic alarms are a strong substitute for human guards. They are
cheaper and they are effective. Their advantage will increase as the costs of labor increase and
the costs of electronic devices decline.

When we think of substitutes we must start really to understand the needs that our industry is
satisfying. For example, why do people buy a watch? Obviously, to tell the time, but is that the
only need that is being met? Watches that simply tell the time can be bought for a few pounds so
why spend thousands? Clearly the watch is meeting other needs like status and fashion; they are
also bought as presents. This then raises the question of that substitutes might meet these needs?
Status can be expressed through other purchases, e.g. cars, clothes, holidays. So when we look
for where threats from substitutes might come from we need to cast our net quite wide, and
unless sellers can upgrade quality or reduce prices via cost reduction they may risk low growth in
sales and profits because of the in-roads that substitutes may make.

The competition from substitutes is affected by the ease with which buyers can switch to a
substitute. A key consideration is usually the buyer‘s switching costs (the costs facing the buyer

51
in changing from one product to a substitute product). For example, if an airline has an all-
Boeing fleet, then the switching costs of moving to a mixed Boeing/airbus fleet would include
flight crew training, maintenance training and spares.

Substitute can take many forms; product – to – product, new product/service rendering similar
service with existing, generic substation (competing for the same customer, e.g. Awash
International Bank and Commercial Bank of Ethiopia). Companies facing threat of substation
need to build in switching costs through added product/services quality that meets buyers‘ needs.

4. Bargaining Power of Buyers

A company's buyers may be the customers who ultimately consume its products (its end users),
but they may also be the companies that distribute its products to end users, such as retailers and
wholesalers. Buyers can be viewed as a competitive threat when they are in a position to demand
lower prices from the company or when they demand better service (Which can increase
operating costs). On the other hand, when buyers are weak, a company can raise its prices and
earn greater profits. Whether buyers are able to make demands on a company depends on their
power relative to that of the company.

Buyers bargain for low price, higher quality and more services. They play competition against
each other. Powerful buyers can bargain away potential profits from the firms in the industry.
They can cause firms to undercut each other in order to get the buyer‘s business, and they can
use their power to extract other benefits from firms like quality improvements, credit etc.

According to Porter, buyers are most powerful in the following circumstances:

1) When the supply industry is composed of many small companies and the buyers are few in
number and large. These circumstances allow the buyers to dominate supply companies.
2) When the buyers purchase in large quantities. That is when customers‘ purchases represent a
sizeable percentage of the selling industry‘s total sales. In such circumstances, buyers can
use their purchasing power as leverage to bargain for price reductions.
3) When the supply industry depends on the buyers for a large percentage of its total orders.
4) When the selling industry comprises large numbers of small sellers.
5) When the item being purchased is sufficiently standardized that customers can both find
other suppliers easily and switch to them at virtually zero cost,

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6) When the item being bought is not an important input.
7) When the buyers can switch orders between supply companies at a low cost, thereby playing
off companies against each other to (force down prices).
8) When it is economically feasible for the buyers to purchase the input from several
companies at once. In other wards when it is economically feasible for customers to
purchase the input from several suppliers rather than one
5. Bargaining Power of suppliers
In a similar vein to buyers, suppliers of vital resources to the industry can exact high prices,
leading to a squeeze on profits through higher input costs. Hostile suppliers exercise bargaining
power by rising price and quality of purchased good/service. Powerful suppliers effectively
affect profit of industry. Such suppliers would include suppliers of raw materials, power, skilled
labor, components, etc.
Suppliers can be viewed as a threat when they are able to force up the price that a company must
pay for its inputs or reduce the quality of the inputs they supply, thereby depressing the
company's profitability. On the other hand, if suppliers are weak, this gives a company the
opportunity to force down prices and demand higher input quality. As with buyers, the ability of
suppliers to make demands on a company depends on their power relative to that of the
company.
Suppliers are most powerful:

1. When the input is, in one way or another, important to the buyer.
2. The supplier industry is dominated by a few large producers who enjoy reasonably secure
market positions and who are not beleaguered by intensely competitive market conditions.
That is when they are few in number as compared to industry which purchase their
product
3. When the product that they sell has no substitute /few substitutes and is important to the
company.
4. When the company's industry is not an important customer of theirs. In such instances, the
suppliers' health does not depend on the company's industry, and suppliers have little
incentive to reduce prices or improve quality.
5. Suppliers sell to fragmented buyer

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 6. When their respective products are differentiated to such an extent that it is costly for a
company to switch from one supplier to another. That is when suppler built up smart
switching cost. In such cases, the company depends on its suppliers and cannot play them
off against each other.
7. When, to raise prices, they can use the threat of vertically integrating forward into the
industry and competing directly with the company.
8. When buying companies cannot use the threat of vertically integrating backward and
supplying their own needs as a means to reduce input prices.
The concept of supplier can be extended to include the supply of management expertise, skilled
labor and the supply of capital. Clearly, these vital resources are rarely in abundance, and firms
are often required to minimize their dependence on outside sources of supply through developing
their own managers, training their staff and by financing expansion through retained earnings.

3.1.6. Forecasting Tools and Techniques

Forecasts are educated assumptions about future trends and events. Forecasting is a complex
activity because of factors such as technological innovation, cultural changes, new products,
and improved services, stronger competitor‘s shifts in government priorities, changing social
values, unstable economic conditions, and unforeseen events. Managers often must rely on
published forecasts to effectively identify key external opportunities and threats.
Most organizations forecast (project) their own revenues and profits annually. Organizations
sometimes fore- cast market share or customer loyalty in local areas. Because forecasting is so
important in strategic management and because the ability to forecast (in contrast to the ability to
use a forecast) is essential, selected forecasting tools are examined further here. Forecasting tools
can be broadly categorized into two groups: quantitative techniques and qualitative techniques.

1. Quantitative forecasts
An econometric model: is one of the tools economists use to forecast future developments in
the economy. In the simplest terms, econometricians measure past relationships among such
variables as consumer spending, household income, tax rates, interest rates, employment, and the
like, and then try to forecast how changes in some variables will affect the future course of
others.

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Regression analysis: Statistical approach to forecastingchange in a dependent variable (sales
revenue, for example) on the basis of change in one or more independent variables (population
and income, for example). Known also as curve fitting or line fitting because a regression
analysis equation can be used in fitting a curve or line to data points, in a manner such that the
differences in the distances of data points from the curve or line are minimized. Relationships
depicted in a regression analysis are, however, associative only, and any cause-effect (causal)
inference is purely subjective. It is also called regression method or regression technique.
Trend extrapolation is one aspect of the larger field of trend (or trend line) analysis. It attempts
to extend known data points to regions beyond the timeframe of known data points, almost
always in an attempt to predict future values with some degree of probability.

2. Qualitative forecasts
Jury of Executive Opinion: when executives from various corporate functions involved in
forecasting sales (e.g., finance, marketing, sales, production, and logistics) meet to generate
forecasts, is the meeting is termed a jury of executive opinion. The jury of executive opinion is
one of the most familiar and frequently used of all forecasting techniques.
Delphi technique survey: - is usually inexpensive to use. It is also especially relevant when data
are lacking, quality of data is poor or when experts seem not to agree on issues. Furthermore, it
could be used to answer questions about market size and positions. It is more accurate than an
unaided judgment because it uses unbiased experts, answering structured questions and then
forecasts are summarized in an objective way by an independent coordinator or monitoring
group who does not actually participate in the Delphi analysis.
Sales Force Composite: - The sales force composite is a qualitative forecastingmethod that uses
the knowledge and experience of a company‘ssalespeople, its sales management, and/or channel
members to producesales forecasts. The grass roots approach to a sales force
compositeaccumulates sales forecasts for the regions, products, and/or customersof individual
salespeople. The sales management approach seeks salesforecasts from sales executives and is
essentially a jury of executiveopinion, albeit consisting of a narrower range of executives (i.e.,
onlysales executives or only sales and marketing executives). The distributorapproach to the
sales force composite solicits the sales predictions ofindependent distributors of a company‘s
products.

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Scenario forecast: - Under this approach, the forecaster starts with different sets of assumptions.
For each set of assumptions, a likely scenario of the business outcome is charted out. Thus, the
forecaster would be able to generate many different future scenarios (corresponding to the
different sets of assumptions). The decision maker or businessperson is presented with the
different scenarios, and has to decide which scenario is most likely to prevail.

Brainstorming sessions: - The subjective approach allows individuals participating in the

forecasting decision to arrive at a forecast based on their subjective feelings and ideas. This
approach is based on the premise that a human mind can arrive at a decision based on factors that
are often very difficult to quantify. "Brainstorming sessions" are frequently used as a way to
develop new ideas or to solve complex problems. In loosely organized sessions, participants feel
free from peer pressure and, more importantly, can express their views and ideas without fear of
criticism. Many corporations in the United States have started to increasingly use the subjective
approach.
Scenario planning is a useful technique to address complex environmental variables by exploring
the likelihood of possible future development and changes and to identify the interaction of
uncertain future trends and events. Simply scenarios refer to stories pertaining to the possible
future state of the environment and how a firm might respond. Scenarios are not based on hunch
or inanition; require detail analysis available data. In scenarios development the number of
assumptions should be kept minimum, to overcome complexity of drawing up scenarios. Key
environmental variables should also be identified. The following figure shows scenario planning
steps

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 CHAPTER-FOUR
Internal Environment Analysis

4.1. The Nature of Internal Audit

Internal analysis (strategic capability assessment) is the process by which the strategist defines
the distinctive competencies of his/her firm, i.e. the strength as well as the weakness in managing
resource and performing identified functions. It is the process that matches internal competencies
of the firm (strength) with environmental opportunities and minimize weakness of the firms to
meet the threat posed by the environment.
Strategic internal capability assessment involve (1) resource audit – quantity and quality of
resources available to the firm, (2) resource analysis – individual strengths and synergistic
linkage (value chain analysis), (3) identifying core competence; provides potential access to a
wide variety of market, make significant contribution to perceived customer benefits of the end
product, and is difficult for competitors to imitate ( outperform competitors and provide
supreme value for customer, (4) Comparative analysis of competencies (determine competitive
position and uniqueness using; historical analysis, industry norms, benchmarking) , (5)
Assessing overall balance and mix(Interaction of each unit, and portfolio analysis) and (6)
identification of critical success factor (factors for successful gaining and maintaining a
competitive advantage )

Resource audit must be comprehensive. It should be based on defined criterion. Some elements
of resource audit include among others :( 1) Financial resource (debt-equity ratio, return on
investment, credit rate etc ), (2) physical resource (plant size, economics of scale, resale value of
fixed assets, alternative use of fixed assets etc ), (3) human Resource ( qualification, labor
relation, compensation package , labor turnover etc ), (4)Technological( significance of patent,
research and development employees, facilities and expenditure etc ), and (5)reputation on
intangibles ( loyalty, quality etc).

A distinctive competency is a unique strength that allows a company to achieve superior

efficiency, quality, innovation or customer responsiveness and thereby to create superior value
and attain a competitive advantage. A firm with a distinctive competency can differentiate its

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products or achieve substantially lower costs than its rivals. Consequently, it creates more value
than its rivals and will earn a profit rate substantially above the industry's average.

The distinctive competencies of an organization arise from two complementary sources: its
resources and capabilities. The financial, physical, human, technological, and organizational
resources of the company can be divided into tangible resources (land, buildings, plant, and
equipment) and intangible resources (brand names, reputation, patents, and technological or
marketing know-how). To give rise to a distinctive competency, a company's resources must be
both unique and valuable. A unique resource is one that no other company has.

Capabilities refer to a company's skills at coordinating its resources and putting them to
productive use. These skills reside in an organization's routines, that is, in the way a company
makes decisions and manages its internal processes in order to achieve organizational objectives.
More generally, a company's capabilities are the product of its organizational structure and
control systems. They specify how and where decisions are made within a company, the kind of
behaviors the company rewards, and the company's cultural norms and values. It is important to
keep in mind that capabilities are, by definition, intangible. They reside not so much in
individuals as in the way individuals interact, cooperate, and make decisions within the context
of an organization.

The distinction between resources and capabilities is critical to understanding what generates a
distinctive competency. A company may have unique and valuable resources, however unless it
has the capability to use those resources effectively it may not be able to create or sustain a
distinctive competency.

The experiences of different organizations – both large and small – indicate that thorough
internal assessment is critical in developing a strategy. This analysis is necessary to identify the
organization‘s competitive advantages and disadvantages. Competitive advantages and
disadvantages are the strengths and weaknesses of the organization relative to its present and
likely future competitors. Pearce and Robinson (1991) have defined the strengths and
weaknesses of the organization as follows.

Strengths: Strength is a resource, skill, or other advantage relative to competitors and the needs
of the markets a firm serves or expects to serve. It is a distinctive competence that gives the firm

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a comparative advantage in the market place. Strengths may exist with regard to financial
resources, image, market leadership, buyer/supplier relations, and other factors.

Weaknesses: A weakness is a limitation or deficiency in resource, and capabilities that seriously

impedes a firm‘s effective performance. Facilities, financial resources, management capabilities,
marketing skills, and brand image can be source of weaknesses.

Overall, the internal analysis of an organization is both quantitative and qualitative assessment of
the organization as it is today in terms of people, financial resources, technological capability,
and information sources. It must be borne in mind that simply knowing the sheer number of
resources, for example employees, may not be enough when the key issues may become the
skills they bring to the job, the experiences they have or the intangibles such as work motivation
or morale. Similarly, knowing the absolute size of the budget may be less important than
knowing how flexibly that money can be spent. A qualitative look at the resources of the
organization is the prime indicator of the ability of the organization to succeed with the strategic
change effort.

All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. Internal strengths/weaknesses, coupled with
external opportunities/threats and a clear statement of mission, provide the basis for establishing
objectives and strategies. Objectives and strategies are established with the intention of
capitalizing upon internal strengths and overcoming weaknesses. Internal audit provide more
opportunity for participants to understand how their jobs, departments, and others fit into the
whole organization. It enables participants (managers and employees) to perform better through
understanding how their work affects other areas and activities of the firm. Internal audit
requires gathering, organizing and evaluating about the firms operations.

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4.2. The process of analyzing internal resources of an organization
It involves four basic steps: these are:
1. Developing a profile of the organization‘s principal resources and skills in broad areas:
financial; physical, organizational and human; and technological.
2. Determining the key success requirement of the product/market segments in which the
organization competes or might compete.
3. Comparing the resource profile to the key success requirements to determine the major
strengths on which an effective strategy can be based and the major weaknesses to be
overcome.
4. Comparing the organization‘s strengths and weaknesses with those of its major
competitors to identify which of its resources and skills are sufficient to yield competitive
advantages in the marketplace.

4.3. Relationship among the functional areas of business

Relationships among a firm‘s functional business activities perhaps can be exemplified best by
focusing on organizational culture, an internal phenomenon that permeates all departments and
divisions of an organization. Organizational culture can be defined as ―a pattern of behavior that
has been developed by an organization as it learns to cope with its problem of external adaptation
and internal integration, and that has worked well enough to be considered valid and to be taught
to new members as the correct way to perceive, think, and feel.

This definition emphasizes the importance of matching external with internal factors in making
strategic decisions. Organizational culture captures the subtle, elusive, and largely unconscious
forces that shape a workplace. Remarkably resistant to change culture can represent a major
strength or weakness for the firm. It can be an underlying reason for strengths or weaknesses in any
of the major business functions. An organization‘s culture compares to an individual‘s personality
in the sense that no two organizations have the same culture and no two individuals have the same
personality. Both culture and personality are enduring and can be warm, aggressive, friendly, open,
innovative, conservative, liberal, harsh, or likable.

The potential value of organizational culture has not been realized fully in the study of strategic
management. Ignoring the effect that culture can have on relationships among the functional

60
areas of business can result in barriers to communication, lack of coordination, and an inability
to adapt to changing conditions. Some tension between culture and a firm‘s strategy is
inevitable, but the tension should be monitored so that it does not reach a point at which
relationships are severed and the culture becomes antagonistic. The resulting disarray among
members of the organization would disrupt strategy formulation, implementation, and
evaluation. In contrast, a supportive organizational culture can make managing much easier.
Internal strengths and weaknesses associated with a firm‘s culture sometimes are overlooked
because of the inter functional nature of this phenomenon. It is important, therefore, for
strategists to understand their firm as a sociocultural system. Success is often determined by
linkages between a firm‘s culture and strategies. The challenge of strategic management today
is to bring about the changes in organizational culture and individual mind-sets that are needed
to support the formulation, implementation, and evaluation of strategies. The different
functional areas of business are as follows

I. Management
The functions of management consist of five basic activities: planning, organizing, motivating,
staffing, and controlling.
The Basic Functions of Management
Function Description Stage of Strategic-
Management
Process When Most Important
Planning Planning consists of all those managerial activities Strategy Formulation
related to preparing for the future. Specific tasks
include forecasting, establishing objectives, devising
strategies, developing policies, and setting goals.
Organizing Organizing includes all those managerial activities that Strategy Implementation
result in a structure of task and authority relationships.
Specific areas include organizational design, job
specialization, job descriptions, job specifications,
span of control, and unity of command, coordination,
job design, and job analysis.

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Motivating Motivating involves efforts directed toward shaping Strategy Implementation
human behavior. Specific topics include leadership,
communication, work groups, behavior modification,
and delegation of authority, job enrichment, job
satisfaction, needs fulfillment, organizational change,
employee morale, and managerial morale.
Staffing Staffing activities are centered on personnel or human Strategy Implementation
resource management. Included are wage and salary
administration, employee benefits, interviewing,
hiring, firing, training, management development,
employee safety, affirmative action, equal employment
opportunity, union relations, career development,
personnel research, discipline policies, grievance
procedures, and public relations.
Controlling Controlling refers to all those managerial activities Strategy Evaluation
directed toward ensuring that actual results are
consistent with planned results. Key areas of concern
include quality control, financial control, sales control,
inventory control, and expense control, analysis of
variances, rewards, and sanctions.

Management Audit Checklist of Questions

The following checklist of questions can help determine specific strengths and weaknesses in the
functional area of business. Positive or yes answers to the checklist questions suggest potential
areas of strength.
1. Does the firm use strategic-management concepts?
2. Are company objectives and goals measurable and well communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization‘s structure appropriate?
6. Are job descriptions and job specifications clear?
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7. Is employee morale high?
8. Are employee turnover and absenteeism low?
9. Are organizational reward and control mechanisms effective?

II. Marketing
Marketing can be described as the process of defining, anticipating, creating, and fulfilling
customers‘ needs and wants for products and services. There are seven basic functions of
marketing: (1) customer analysis, (2) selling products/services, (3) product and service planning,
(4) pricing, (5) distribution, (6) marketing research, and (7) opportunity analysis. Understanding
these functions helps strategists identify and evaluate marketing strengths and weaknesses.
Customer Analysis
Customer analysis—the examination and evaluation of consumer needs, desires, and wants—
involves administering customer surveys, analyzing consumer information, evaluating market
positioning strategies, developing customer profiles, and determining optimal market
segmentation strategies. The information generated by customer analysis can be essential in
developing an effective mission statement.
Selling Products/Services
Successful strategy implementation generally rests upon the ability of an organization to sell
some product or service. Selling includes many marketing activities, such as advertising, sales
promotion, publicity, personal selling, sales force management, customer relations, and dealer
relations. These activities are especially critical when a firm pursues a market penetration
strategy.
Product and Service Planning
Product and service planning includes activities such as test marketing; product and brand
positioning; devising warranties; packaging; determining product options, features, style, and
quality; deleting old products; and providing for customer service. Product and service planning
is particularly important when a company is pursuing product development or diversification.
One of the most effective product and service planning techniques is test marketing.
Pricing
Five major stakeholders affect pricing decisions: consumers, governments, suppliers,
distributors, and competitors. Sometimes an organization will pursue a forward integration
strategy primarily to gain better control over prices charged to consumers. Governments can

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impose constraints on price fixing, price discrimination, minimum prices, unit pricing, price
advertising, and price controls.

Distribution

Distribution includes warehousing, distribution channels, distribution coverage, retail site

locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and
retailing. Most producers today do not sell their goods directly to consumers. Various marketing
entities act as intermediaries; they bear a variety of names such as wholesalers, retailers, brokers,
facilitators, agents, vendors or simply distributors. Distribution becomes especially important
when a firm is striving to implement a market development or forward integration strategy.
Marketing Research

Marketing research is the systematic gathering, recording, and analyzing of data about problems
relating to the marketing of goods and services. Marketing research can uncover critical
strengths and weaknesses, and marketing researchers employ numerous scales, instruments,
procedures, concepts, and techniques to gather information.

Cost/Benefit Analysis

The seventh function of marketing is cost/benefit analysis, which involves assessing the costs,
benefits, and risks associated with marketing decisions. Three steps are required to perform a
cost/benefit analysis: (1) compute the total costs associated with a decision, (2) estimate the
total benefits from the decision, and (3) compare the total costs with the total benefits. When
expected benefits exceed total costs, an opportunity becomes more attractive.

Marketing Audit Checklist of Questions

The following questions about marketing must be examined in strategic planning:
1. Are markets segmented effectively?
2. Is the organization positioned well among competitors?
3. Has the firm‘s market share been increasing?
4. Are present channels of distribution reliable and cost effective?
5. Does the firm have an effective sales organization?

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6. Does the firm conduct market research?
7. Are product quality and customer service good? etc.

III. Finance/Accounting

According to James Van Horne, the functions of finance/accounting comprise three decisions: the
investment decision, the financing decision, and the dividend decision. Financial ratio analysis is
the most widely used method for determining an organization‘s strengths and weaknesses in the
investment, financing, and dividend areas. Dividend decisions concern issues such as the
percentage of earnings paid to stockholders, the stability of dividends paid over time, and the
repurchase or issuance of stock.

Finance/Accounting Audit Checklist

The following finance/accounting questions, like the similar questions about marketing and
management earlier, should be examined:
1. Where is the firm financially strong and weak as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and stockholders?
8. Are the firm‘s financial managers experienced and well trained?
9. Is the firm‘s debt situation excellent?

IV. Production/Operations
The production/operations function of a business consists of all those activities that transform
inputs into goods and services. Production/operations management deals with inputs,
transformations, and outputs that vary across industries and markets. A manufacturing operation
transforms or converts inputs such as raw materials, labor, capital, machines, and facilities into
finished goods and services. As indicated in Table 4-3, Roger Schroeder suggested that

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production/operations management comprises five functions or decision areas: process, capacity,
inventory, workforce, and quality.
The Basic Functions (Decisions) Within Production/Operations
Decision Areas Example Decisions
Process These decisions include choice of technology, facility layout, process flow
analysis, facility location, line balancing, process control, and transportation
analysis. Distances from raw materials to production sites to customers are a
major consideration.
Capacity These decisions include forecasting, facilities planning, aggregate planning,
scheduling, capacity planning, and queuing analysis. Capacity utilization is a
major consideration.
Inventory These decisions involve managing the level of raw materials, work-in-process,
and finished goods, especially considering what to order, when to order, how
much to order, and materials handling.
Workforce these decisions involve managing the skilled, unskilled, clerical, and
managerial employees by caring for job design, work measurement, job
enrichment, work standards, and motivation techniques.
Quality These decisions are aimed at ensuring that high-quality goods and services are
produced by caring for quality control, sampling, testing, quality assurance,
and cost control.
Source: Adapted from R. Schroeder, Operations Management (New York: McGraw-Hill,
1981): 12.
Production/Operations Audit Checklist
Questions such as the following should be examined:
1. Are supplies of raw materials, parts, and subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in good condition?
3. Are inventory-control policies and procedures effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically located?
6. Does the firm have technological competencies?

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 V. Research and Development
The fifth major area of internal operations that should be examined for specific strengths and
weaknesses is research and development (R&D). Many firms today conduct no R&D, and yet
many other companies depend on successful R&D activities for survival. Firms pursuing a
product development strategy especially need to have a strong R&D orientation. Effective
management of the R&D function requires a strategic and operational partnership between R&D
and the other vital business functions.
Research and Development Audit
Questions such as the following should be asked in performing an R&D audit:
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization‘s R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems adequate?
6. Is communication between R&D and other organizational units effective?
7. Are present products technologically competitive?

VI. Management Information Systems

Information ties all business functions together and provides the basis for all managerial
decisions. It is the cornerstone of all organizations. Information represents a major source of
competitive management advantage or disadvantage. Assessing a firm‘s internal strengths and
weaknesses in information systems is a critical dimension of performing an internal audit. A
management information system receives raw material from both the external and internal
evaluation of an organization. It gathers data about marketing, finance, production, and personnel
matters internally, and social, cultural, demographic, environmental, economic, political,
governmental, legal, technological, and competitive factors externally. Data are integrated in
ways needed to support managerial decision making.
Management Information Systems Audit
Questions such as the following should be asked when conducting this audit:
1. Do all managers in the firm use the information system to make decisions?
2. Is there a chief information officer or director of information systems position in the firm?

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3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute input to the information system?
5. Are there effective passwords for entry into the firm‘s information system? etc

4.4. Value Chain Analysis

Value chain analysis allows the firm to understand the parts of its operations that create value
and those that do not. Understanding these issues is important because the firm earns above-
average returns only when the value it creates is greater than the costs incurred to create that
value. The value chain is a template that firms use to analyze their cost position and to identify
the multiple means that can be used to facilitate implementation of a chosen business-level
strategy.

As discussed below, a firm‘s value chain is segmented into primary and support activities.
Primary activities are involved with a product‘s physical creation, its sale and distribution to
buyers, and its service after the sale. Support activities provide the assistance necessary for the
primary activities to take place. The value chain shows how a product moves from the raw-
material stage to the final customer. For individual firms, the essential idea of the value chain is
to create additional value without incurring significant costs while doing so and to capture the
value that has been created. In a globally competitive economy, the most valuable links on the
chain are people who have knowledge about customers. This locus of value-creating possibilities
applies just as strongly to retail and service firms as to manufacturers.
Examining the Value-Creating Potential of Primary Activities

Inbound Logistics: Activities, such as materials handling, warehousing, and inventory control,
used to receive, store, and disseminate inputs to a product.
Operations: Are activities necessary to convert the inputs provided by inbound logistics into
final product form. Machining, packaging, assembly, and equipment maintenance are examples
of operations activities.
Outbound Logistics: Activities involved with collecting, storing, and physically distributing the
final product to customers. Examples of these activities include finished-goods warehousing,
materials handling, and order processing.

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Marketing and Sales: Activities completed to provide means through which customers can
purchase products and to induce them to do so. To effectively market and sell products, firms
develop advertising and promotional campaigns, select appropriate distribution channels, and
select, develop, and support their sales force.
Service: Activities designed to enhance or maintain a product‘s value. Firms engage in a range
of service-related activities, including installation, repair, training, and adjustment.
Each activity should be examined relative to competitors‘ abilities. Accordingly, firms rate each
activity as superior, equivalent, or inferior.
Examining the Value-Creating Potential of Support Activities
Procurement: Activities completed to purchase the inputs needed to produce a firm‘s products.
Purchased inputs include items fully consumed during the manufacture of products (e.g., raw
materials and supplies, as well as fixed assets—machinery, laboratory equipment, office
equipment, and buildings).
Technological Development: Activities completed to improve a firm‘s product and the
processes used to manufacture it.
Technological development takes many forms, such as process equipment, basic research and
product design, and servicing procedures.
Human Resource Management: Activities involved with recruiting, hiring, training,
developing, and compensating all personnel.
Firm Infrastructure: Firm infrastructure includes activities such as general management,
planning, finance, accounting, legal support, and governmental relations that are required to
support the work of the entire value chain. Through its infrastructure, the fi rm strives to
effectively and consistently identify external opportunities and threats, identify resources and
capabilities, and support core competencies. Each activity should be examined relative to
competitors‘ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.
4.5. The Internal Factor Evaluation (IFE) Matrix
Another strategy-formulation tool used in summarizing a firm‘s internal strengths and
weaknesses by functional area is the Internal Factor Evaluation (IFE) matrix. The IFE provides a
basis for identifying and evaluating relationships among those functional areas. As always, the
strategists‘ judgment is used to determine the key internal factors, and the step-by-step process
used to construct the IFE is, first, to identify the organization‘s key strengths and weaknesses.

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Second, assign a weight ranging from 0.0 (not important) to 1.0 (all-important) to each key
internal factor.
Regardless of whether a key factor is an internal strength or weakness, factors considered to have
the greatest impact on performance should be assigned the highest weights. The total of all
weights assigned to the factors should be 1.0. The third step is to assign a rating to each strength
and weakness to show whether that variable represents a major weakness (rating ¼ 1); a minor
weakness (rating ¼ 2); a minor strength (rating ¼ 3); or a major strength (rating ¼ 4). Fourth,
multiply each factor‘s weight by its rating to determine a weighted score for each variable. The
final step consists of summing the weighted scores for each variable to determine the total
weighted score for the firm.
An example of an IFE matrix is provided in Exhibit 4.1. Note that the firm‘s major strengths are
found in the financial situation and the service quality, with the second being weighted higher.
Management is also a strength with a 0.25 weight. The major weakness is found in the area of
human resources management, specifically addressing the absence of a pension plan.

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 CHAPTER FIVE

STRATEGY FORMULATION: STRATEGY ANALYSIS AND CHOICE

2.1 Types of strategies

Some of the major strategic alternatives for each of the primary growth stances (retrenchment, stability,
and growth) are summarized in the following three sub-sections.

2.1.1. Corporate level Strategy

A.Growth Strategies
All growth strategies can be classified into one of two fundamental categories: concentration within
existing industries or diversification into other lines of business or industries. When a company's current
industries are attractive, have good growth potential, and do not face serious threats, concentrating
resources in the existing industries makes good sense. Diversification tends to have greater risks, but is
an appropriate option when a company's current industries have little growth potential or are unattractive
in other ways. When an industry consolidates and becomes mature, unless there are other markets to seek
(for example other international markets), a company may have no choice for growth but diversification.

There are two basic concentration strategies, vertical integration and horizontal growth.
Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate)
diversification. Each of the resulting four core categories of strategy alternatives can be achieved
internally through investment and development, or externally through mergers, acquisitions, and/or
strategic alliances -- thus producing eight major growth strategy categories.

Comments about each of the four core categories are outlined below, followed by some key points
about mergers, acquisitions, and strategic alliances.

1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive
position in a growing, attractive industry. A company can grow by taking over functions earlier in the
value chain that were previously provided by suppliers or other organizations ("backward integration").
This strategy can have advantages, e.g., in cost, stability and quality of components, and making
operations more difficult for competitors. However, it also reduces flexibility, raises exit barriers for the
company to leave that industry, and prevents the company from seeking the best and latest components
from suppliers competing for their business.

A company also can grow by taking over functions forward in the value chain previously provided
by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more

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control over such things as final products/services and distribution, but may involve new critical success
factors that the parent company may not be able to master and deliver. For example, being a world-class
manufacturer does not make a company an effective retailer.

Some writers claim that backward integration is usually more profitable than forward integration,
although this does not have general support. In any case, many companies have moved toward less
vertical integration (especially backward, but also forward) during the last decade or so, replacing
significant amounts of previous vertical integration with outsourcing and various forms of strategic
alliances.

2. Horizontal Growth: This strategy alternative category involves expanding the company's existing
products into other locations and/or market segments, or increasing the range of products/services offered
to current markets, or a combination of both. It amounts to expanding sideways at the point(s) in the
value chain that the company is currently engaged in. One of the primary advantages of this alternative is
being able to choose from a fairly continuous range of choices, from modest extensions of present
products/markets to major expansions -- each with corresponding amounts of cost and risk.

3. Related Diversification ( Concentric Diversification): In this alternative, a company expands into a

related industry, one having synergy with the company's existing lines of business, creating a situation in
which the existing and new lines of business share and gain special advantages from commonalities such
as technology, customers, distribution, location, product or manufacturing similarities, and government
access. This is often an appropriate corporate strategy when a company has a strong competitive position
and distinctive competencies, but its existing industry is not very attractive.

4. Unrelated Diversification (Conglomerate Diversification): This fourth major category of corporate

strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones.
The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in
which to invest available funds (in contrast to rather unattractive opportunities in existing industries), risk
reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage of
the product life cycle). Further, this may be an appropriate strategy when, not only the present industry is
unattractive, but the company lacks outstanding competencies that it could transfer to related products or
industries. However, because it is difficult to manage and excel in unrelated business units, it can be
difficult to realize the hoped-for value added.

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Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just
discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic
alliances. Of course, there also can be a mixture of internal and external actions.

B. Stability Strategies
There are a number of circumstances in which the most appropriate growth stance for a company is
stability, rather than growth. Often, this may be used for a relatively short period, after which further
growth is planned. Such circumstances usually involve a reasonable successful company, combined with
circumstances that either permit a period of comfortable coasting or suggest a pause or caution. Three
alternatives are outlined below, in which the actual strategy actions are similar, but differing primarily in
the circumstances motivating the choice of a stability strategy and in the intentions for future strategic
actions.

1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be
appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate after
growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or hostile
environment in which it is prudent to stay in a "holding pattern" until there is change in or more clarity
about the future in the environment.

2. No Change: This alternative could be a cop-out, representing indecision or timidity in making a

choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather
stable environment, e.g., a small business in a small town with few competitors.

3. Grab/take hold of Profits While You Can: This is a non-recommended strategy to try to mask a
deteriorating situation by artificially supporting profits or their appearance, or otherwise trying to act as
though the problems will go away. It is an unstable, temporary strategy in a worsening situation, usually
chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain
before things collapse. Recent terrible examples in the USA are Enron and WorldCom.

C. Retrenchment Strategies
Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or revive
the company through a combination of contraction (general, major cutbacks in size and costs) and
consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when done very
effectively it can succeed in both retaining enough key employees and revitalizing the company.

Captive Company Strategy: This strategy involves giving up independence in exchange for some
security by becoming another company's sole supplier, distributor, or a dependent subsidiary.

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Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive
company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if part of a
diversified corporation).

Liquidation: When a company has been unsuccessful in or has none of the previous three strategic
alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy. There
is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top management
make the decisions rather than turning them over to a court, which often ignores stockholders' interests.

2.2. Guidelines for pursuing strategies

Here are some factors to consider when choosing among alternative strategies:

* It is important to get as clear as possible about objectives and decision criteria (what makes a
decision a "good" one?)

* The primary answer to the previous question, and therefore a vital criterion, is that the chosen
strategies must be effective in addressing the "critical issues" the company faces at this time

* They must be consistent with the mission and other strategies of the organization

* They need to be consistent with external environment factors, including realistic assessments of
the competitive environment and trends

* They fit the company's product life cycle position and market attractiveness/competitive
strength situation

* They must be capable of being implemented effectively and efficiently, including being
realistic with respect to the company's resources

* The risks must be acceptable and in line with the potential rewards

* It is important to match strategy to the other aspects of the situation, including: (a) size, stage,
and growth rate of industry; (b) industry characteristics, including fragmentation, importance of
technology, commodity product orientation, international features; and (c) company position
(dominant leader, leader, aggressive challenger, follower, weak, "stuck in the middle")

* Consider stakeholder analysis and other people-related factors (e.g., internal and external
pressures, risk propensity, and needs and desires of important decision-makers)

* Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most likely,
and pessimistic assumptions.

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2.1.2. Business level strategy
Michael Porter’s four generic strategies

Porter's five Generic Competitive Strategies

He argues that a business needs to make two fundamental decisions in establishing its competitive
advantage: (a) whether to compete primarily on price (he says "cost," which is necessary to sustain
competitive prices, but price is what the customer responds to) or to compete through providing some
distinctive points of differentiation that justify higher prices, and (b) how broad a market target it will aim
at (its competitive scope). These two choices define the following four generic competitive strategies.
Which he argues cover the fundamental range of choices. A fifth strategy alternative (best-cost provider)
is added by some sources, although not by Porter, and is included below:

1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing
products or services at the lowest price. This requires being the overall low-cost provider of the products
or services (e.g., Costco, among retail stores, and Hyundai, among automobile manufacturers).
Implementing this strategy successfully requires continual, exceptional efforts to reduce costs -- without
excluding product features and services that buyers consider essential. It also requires achieving cost
advantages in ways that are hard for competitors to copy or match. Some conditions that tend to make
this strategy an attractive choice are:

* The industry's product is much the same from seller to seller

* The marketplace is dominated by price competition, with highly price-sensitive buyers

* There are few ways to achieve product differentiation that have much value to buyers

* Most buyers use product in same ways -- common user requirements

* Switching costs for buyers are low

* Buyers are large and have significant bargaining power

2. Differentiation: appealing to a broad cross-section of the market through offering differentiating

features that make customers willing to pay premium prices, e.g., superior technology, quality, prestige,
special features, service, convenience (examples are Nordstrom and Lexus). Success with this type of
strategy requires differentiation features that are hard or expensive for competitors to duplicate.
Sustainable differentiation usually comes from advantages in core competencies, unique company
resources or capabilities, and superior management of value chain activities. Some conditions that tend to
favor differentiation strategies are:

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 * There are multiple ways to differentiate the product/service that buyers think have substantial
value

* Buyers have different needs or uses of the product/service

* Product innovations and technological change are rapid and competition emphasizes the latest
product features

* Not many rivals are following a similar differentiation strategy

3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and
competing with lowest prices, which, again, requires having lower cost structure than competitors (e.g., a
single, small shop on a side-street in a town, in which they will order electronic equipment at low prices,
or the cheapest automobile made in the former Bulgaria). Some conditions that tend to favor focus (either
price or differentiation focus) are:

* The business is new and/or has modest resources

* The company lacks the capability to go after a wider part of the total market

* Buyers' needs or uses of the item are diverse; there are many different niches and segments in
the industry

* Buyer segments differ widely in size, growth rate, profitability, and intensity in the five
competitive forces, making some segments more attractive than others

* Industry leaders don't see the niche as crucial to their own success

* Few or no other rivals are attempting to specialize in the same target segment

4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer segment
and competing through differentiating features (e.g., a high-fashion women's clothing boutique in Paris,
or Ferrari).

Long term objectives

Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent
the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies
should be consistent, usually from two to five years.

The Nature of Long-Term Objectives

Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical,

obtainable, and congruent among organizational units. Each objective should also be associated with

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a time line. Objectives are commonly stated in terms such as growth in assets, growth in sales,
profitability, market share, degree and nature of diversification, degree and nature of vertical integration,
earnings per share, and social responsibility. Clearly established objectives offer many benefits. They
provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize
conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs.

Long-term objectives are needed at the corporate, divisional, and functional levels in an organization.
They are an important measure of managerial performance. Without long-term objectives, an organization
would drift aimlessly toward some unknown end! It is hard to imagine an organization or individual being
successful without clear objectives. Success only rarely occurs by accident; rather, it is the result of hard
work directed toward achieving certain objectives.

The Desired Characteristics of Objectives:

i. Quantitative v. Hierarchical
ii. Measurable Vi. Obtainable
iii. Realistic vii. Congruent across departments
iv. Understandable
Not Managing by Objectives

Strategists should avoid:

 Managing by Extrapolation
 Managing by Crisis
 Managing by Subjective
 Managing by Hope
Strategists should avoid the following alternative ways to "not managing by objectives."

• Managing by Extrapolation: adheres the idea is to keep on doing about the same things in the same
ways because things are going well.

• Managing by Crisis: based on the belief that the true measure of a really good strategist is the ability to
solve problems. Because there are plenty of crises and problems to go around for every person and every
organization, strategists ought to bring their time and creative energy to bear on solving the most pressing
problems of the day. Managing by crisis is actually a form of reacting rather than acting and of letting
events dictate what‘s and when‘s of management decisions.

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• Managing by Subjective: built on the idea that there is no general plan for which way to go and what to
do; just do the best you can to accomplish what you think should be done. In short, "Do your own thing,
the best way you know how" (sometimes referred to as the mystery approach to decision making because
subordinates are left to figure out what is happening and why).

• Managing by Hope: based on the fact that the future is laden with great uncertainty and that if we try
and do not succeed, then we hope our second (or third) attempt will succeed. Decisions are predicted on
the hope that they will work and the good times are just around the corner, especially if luck and good
fortune are on our side!

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 A Comprehensive Strategy-Formulation Framework

Important strategy-formulation techniques can be integrated into a three-stage decision making

framework, as shown in Figure 5-1. The tools presented in this framework are applicable to all sizes and
types of organizations and can help strategists identify, evaluate, and select strategies. Stage 1 of the
formulation framework consists of the EFE Matrix, the IFE Matrix, and the Competitive Profile Matrix
(CPM). It is the Input Stage; Stage 1 summarizes the basic input information needed to formulate
strategies. Stage 2, is the Matching Stage, focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 techniques include the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix,
the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy
Matrix. Stage 3, is the Decision Stage, and involves a single technique, the Quantitative Strategic
Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate feasible
alternative strategies identified in Stage 2. A QSPM reveals the relative attractiveness of alternative
strategies and thus provides objective basis for selecting specific strategies.

FIGURE 5.1

The Strategy-Formulation Analytical Framework

STAGE 1: THE INPUT STAGE

External Factor evaluation Competitive Profile Internal Factor Evaluation(IFE) (EFE) Matrix
(CPM) Matrix Matrix

STAGE 2: THE MATCHING STAGE

Strengths-Weaknesses- Strategic Position and Action Boston Consulting Internal-External Grand Strategy
Opportunities-Threats Evaluation(SPACE) Matrix Group(BCG) Matrix (IE) Matrix Matrix
(SWOT) Matrix

STAGE 3: THE DECISION STAGE

Quantitative Strategic Planning Matrix (QSPM)

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All nine techniques included in the strategy-formulation framework require the integration of intuition
and analysis. Autonomous divisions in an organization commonly use strategy-formulation techniques to
develop strategies and objectives. Divisional analyses provide a basis for identifying, evaluating, and
selecting among alternative corporate-level strategies. Strategists themselves, not analytic tools, are
always responsible and accountable for strategic decisions. Lenz emphasized that the shift from a words-
oriented to a numbers oriented planning process can give rise to a false sense of certainty; it can reduce
dialogue, discussion, and argument as a means for exploring understandings, testing assumptions, and
fostering organizational learning. Strategists, therefore, must be wary of this possibility and use analytical
tools to facilitate, rather than to diminish, communication. Without objective information and analysis,
personal biases, politics, emotions, personalities, and halo error (the tendency to put too much weight on
a single factor) unfortunately may play a dominant role in the strategy-formulation process.

Stage 1: The input stage

Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented in Chapters 4. The
information derived from these three matrices provides basic input information for the matching and
decision stage matrices described later on. The input tools require strategists to quantify subjectivity
during early stages of the strategy-formulation process. Making small decisions in the input matrices
regarding the relative importance of external and internal factors allows strategists to more effectively
generate and evaluate alternative strategies. Good intuitive judgment is always needed in determining
appropriate weights and ratings.

Stage 2: The matching stage.

Strategy is sometimes defined as the match an organization makes between its internal resources and
skills and the opportunities and risks created by its external factors. The matching stage of the strategy-
formulation framework consists of five techniques that can be used in any sequence: the SWOT Matrix,
the SPACE Matrix, the BCG Matrix, the IE Matrix, and the Grand Strategy Matrix. These tools rely upon
information derived from the input stage to match external opportunities and threats with internal
strengths and weaknesses. Matching external and internal critical success factors is the key to effectively
generating feasible alternative strategies. For example, a firm with excess working capital (an internal
strength) could take advantage of the cell phone industry‘s 20 percent annual growth rate (an external
opportunity) by acquiring Cell phone, Inc., a firm in the cell phone industry. This example portrays
simple one-to-one matching. In most situations, external and internal relationships are more complex, and
the matching requires multiple alignments for each strategy generated. Any organization, whether
military, product-oriented, service-oriented, governmental, or even athletic, must develop and execute

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good strategies to win. A good offense without a good defense, or vice versa, usually leads to defeat.
Developing strategies that use strengths to capitalize on opportunities could be considered an offense,
whereas strategies designed to improve upon weaknesses while avoiding threats could be termed
defensive. Every organization has some external opportunities and threats and internal strengths and
weaknesses that can be aligned to formulate feasible alternative strategies.

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix

The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching tool that

helps managers develop four types of strategies: SO (strengths-opportunities) Strategies, WO
(weaknesses-opportunities) Strategies, ST (strengths-threats) Strategies, and WT (weaknesses-threats)
Strategies. Matching key external and internal factors is the most difficult part of developing a SWOT
Matrix and requires good judgment—and there is no one best set of matches. SO Strategies use a firm‘s
internal strengths to take advantage of external opportunities. All managers would like their organizations
to be in a position in which internal strengths can be used to take advantage of external trends and events.
Organizations generally will pursue WO, ST, or WT strategies to get into a situation in which they can
apply SO Strategies. When a firm has major weaknesses, it will strive to overcome them and make them
strengths. When an organization faces major threats, it will seek to avoid them to concentrate on
opportunities.

WO Strategies aim at improving internal weaknesses by taking advantage of external opportunities.

Sometimes key external opportunities exist, but a firm has internal weaknesses that prevent it from
exploiting those opportunities. For example, there may be a high demand for electronic devices to control
the amount and timing of fuel injection in automobile engines (opportunity), but a certain auto parts
manufacturer may lack the technology required for producing these devices (weakness). One possible
WO Strategy would be to acquire this technology by forming a joint venture with a firm having
competency in this area. An alternative WO Strategy would be to hire and train people with the required
technical capabilities. ST Strategies use a firm‘s strengths to avoid or reduce the impact of external
threats. This does not mean that a strong organization should always meet threats in the external
environment head-on. An example of ST Strategy occurred when Taxes Instruments used an excellent
legal department (a strength) to collect nearly $700 million in damages and royalties from nine Japanese
and Korean firms that infringed on patents for semiconductor memory chips (threat).

Rival firms that copy ideas, innovations, and patented products are a major threat in many industries. This
is still a major problem for U.S. firms selling products in China. WT Strategies are defensive tactics
directed at reducing internal weakness and avoiding external threats. An organization faced with

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numerous external threats and internal weaknesses may indeed be in a precarious position. In fact, such a
firm may have to fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation. A
schematic representation of the SWOT Matrix is provided in Figure 5-2. Note that a SWOT Matrix is
composed of nine cells. As shown, there are four key factor cells, four strategy cells, and one cell that is
always left blank (the upper-left cell). The four strategy cells, labeled SO, WO, ST, and WT, are developed
after completing four key factor cells, labeled S, W, O, and T.

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A SWOT Matrix for a Retail Computer Store

Figure 5-2

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There are eight steps involved in constructing a SWOT Matrix:

1. List the firm‘s key external opportunities.

2. List the firm‘s key external threats.

3. List the firm‘s key internal strengths.

4. List the firm‘s key internal weaknesses.

5. Match internal strengths with external opportunities, and record the resultant SO Strategies in the
appropriate cell.

6. Match internal weaknesses with external opportunities, and record the resultant WO Strategies.

7. Match internal strengths with external threats, and record the resultant ST Strategies.

8. Match internal weaknesses with external threats, and record the resultant WT Strategies.

Limitations with SWOT Matrix

 Does not show how to achieve a competitive advantage

 Provides a static assessment in time
 May lead the firm to overemphasize a single internal or external factor in formulating strategies.

The Strategic Position and Action Evaluation (SPACE) Matrix

The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2 matching tool,
is illustrated in Figure 5-3. Its four-quadrant framework indicates whether aggressive, conservative,
defensive, or competitive strategies are most appropriate for a given organization. The axes of the SPACE
Matrix represent two internal dimensions (financial position (FP) and competitive position (CP) and two
external dimensions (Environmental position (SP) and industry position (IP). These four factors are
perhaps the most important determinants of an organization‘s overall strategic position. Depending on the
type of organization; numerous variables could make up each of the dimensions represented on the axes
of the SPACE Matrix. Factors that were included earlier in the firm‘s EFE and IFE Matrices should be
considered in developing a SPACE Matrix. Other variables commonly included are given in Table 5-1.
For example, return on investment, leverage, liquidity, working capital, and cash flow are commonly
considered to be determining factors of an organization‘s financial strength. Like the SWOT Matrix, the

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SPACE Matrix should be both tailored to the particular organization being studied and based on factual
information as much as possible

Steps to Developing a SPACE Matrix

1. Select a set of variables to define financial position (FP), competitive position (CP), Environmental
position (EP), and industry position (IP).

2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the
FP and IP dimensions. Assign a numerical value ranging from -1 (best) to -7 (worst) to each of the
variables that make up the SP and CP dimensions. On the FP and CP axes, make comparison to
competitors. On the IP and SP axes, make comparison to other industries.

3. Compute an average score for FP, CP, IP, and SP by summing the values given to the variables of each
dimension and then by dividing by the number of variables included in the respective dimension.

4. Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix.

5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and
plot the resultant point on Y. Plot the intersection of the new xy point.

6. Draw a directional vector from the origin of the SPACE Matrix through the new intersection point.
This vector reveals the type of strategies recommended for the organization: aggressive, competitive,
defensive, or conservative.

Figure 5.3

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86
TABLE 5.1 Example Factors That Make Up the SPACE

Matrix Axes

Internal Strategic Position External Strategic Position

Financial Position (FP) Stability Position (SP)
 Return on investment  Technological changes
 Leverage  Rate of inflation
 Liquidity  Demand variability
 Working capital  Price range of competing products
 Cash flow  Barriers to entry into market
 Inventory turnover  Competitive pressure
 Earnings per share  Ease of exit from market
 Price earnings ratio  Price elasticity of demand
 Risk involved in business
Competitive Position (CP) Industry Position (IP)
 Market share  Growth potential
 Product quality  Profit potential
 Product life cycle  Financial stability
 Customer loyalty  Extent leveraged
 Capacity utilization  Resource utilization
 Technological know-how  Ease of entry into market
 Control over suppliers and distributors  Productivity, capacity utilization

The Boston Consulting Group (BCG) Matrix

Autonomous divisions (or profit centers) of an organization make up what is a business portfolio. When a
firm‘s divisions compete in different industries, a separate strategy often must be developed for each
business. The Boston Consulting Group (BCG) Matrix and the Internal-External (IE) Matrix are designed
specifically to enhance a multidivisional firm‘s efforts to formulate strategies. (BCG is a private
management consulting firm based in Boston. BCG employs about 4,300 consultants worldwide.) In a
Form 10K or Annual Report, some companies do not disclose financial information by segment, so a
BCG portfolio analysis is not possible by external entities. Reasons to disclose by-division financial
information in the author‘s view, however, more than offset the reasons not to disclose, as indicated in

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Table 5-4. The BCG Matrix graphically portrays differences among divisions in terms of relative
market share position and industry growth rate. The BCG Matrix allows a multidivisional
organization to manage its portfolio of businesses by examining the relative market share position and
the industry growth rate of each division relative to all other divisions in the organization. Relative
market share position is defined as the ratio of a division‘s own market share (or revenues) in a particular
industry to the market share (or revenues) held by the largest rival firm in that industry.

The basic BCG Matrix appears in Figure 5.4. Each circle represents a separate division. The size of the
circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice
indicates the proportion of corporate profits generated by that division. Divisions located in Quadrant I of
the BCG Matrix are ―Question Marks,‖ those located in Quadrant II are ―Stars,‖ those located in Quadrant
III are ―Cash Cows,‖ and those divisions located in Quadrant IV are ―Dogs.‖

• Question Marks—Divisions in Quadrant I have a low relative market share position, yet they compete
in a high-growth industry. Generally these firms‘ cash needs are high and their cash generation is low.
These businesses are Question Marks because the organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration, market development, or product development) or to
sell them.

• Stars—Quadrant II businesses (Stars) represent the organization‘s best long-run opportunities for
growth and profitability. Divisions with a high relative market share and a high industry growth rate
should receive substantial investment to maintain or strengthen their dominant positions. Forward,
backward and horizontal integration; market penetration; market development; and product development
are appropriate strategies for these divisions to consider, as indicated in Figure 5.4.

• Cash Cows—Divisions positioned in Quadrant III have a high relative market share position but
compete in a low-growth industry. Called Cash Cows because they generate cash in excess of their needs,
they are often milked. Many of today‘s Cash.

FIGURE 5.4

The BCG Matrix

Relative market share position

High Medium Low

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 • Backward, Forward, or Horizontal • Market Penetration ?
Integration
• Market Development
• Market Penetration
• Product Development
• Market Development
INDUSTRY SALES GROWTH RATE

• Divestiture
• Product Development
(Percentage)

Question Marks
Stars
I
II

• Product Development • Retrenchment

• Diversification • Divestiture

• Retrenchment • Liquidation

• Divestiture

Cash Cows
Dogs
III
IV

Source: Adapted from the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The
Boston Consulting Group.

Cows were yesterday‘s Stars. Cash Cow divisions should be managed to maintain their strong position for
as long as possible. Product development or diversification may be attractive strategies for strong Cash
Cows. However, as a Cash Cow division becomes weak, retrenchment or divestiture can become more
appropriate.

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• Dogs—Quadrant IV divisions of the organization have a low relative market share position and compete
in a slow- or no-market-growth industry; they are Dogs in the firm‘s portfolio. Because of their weak
internal and external position, these businesses are often liquidated, divested, or trimmed down through
retrenchment. When a division first becomes a Dog, retrenchment can be the best strategy to pursue
because many Dogs have bounced back, after strenuous asset and cost reduction, to become viable,
profitable divisions. The major benefit of the BCG Matrix is that it draws attention to the cash flow,
investment characteristics, and needs of an organization‘s various divisions. The divisions of many firms
evolve over time: Dogs become Question Marks, Question Marks become Stars, Stars become Cash
Cows, and Cash Cows become Dogs in an ongoing counterclockwise motion. Less frequently, Stars
become Question Marks, Question Marks become Dogs, Dogs become Cash Cows, and Cash Cows
become Stars (in a clockwise motion). In some organizations, no cyclical motion is apparent. Over time,
organizations should strive to achieve a portfolio of divisions that are Stars.

The Internal-External (IE) Matrix

FIGURE 5.5

The Internal-External (IE) Matrix positions an organization‘s various divisions in a nine cell display,
illustrated in Figure 5.5. The IE Matrix is similar to the BCG Matrix in that both tools involve plotting
organization divisions in a schematic diagram; this is why they are both called ―portfolio matrices.‖ Also,

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the size of each circle represents the percentage sales contribution of each division, and pie slices reveal
the percentage profit contribution of each division in both the BCG and IE Matrix. But there are some
important differences between the BCG Matrix and the IE Matrix. First, the axes are different. Also, the
IE Matrix requires more information about the divisions than the BCG Matrix. Furthermore, the strategic
implications of each matrix are different. For these reasons, strategists in multidivisional firms often
develop both the BCG Matrix and the IE Matrix in formulating alternative strategies. A common practice
is to develop a BCG Matrix and an IE Matrix for the present and then develop projected matrices to
reflect expectations of the future. This before-and-after analysis forecasts the expected effect of strategic
decisions on an organization‘s portfolio of divisions. The IE Matrix is based on two key dimensions: the
IFE total weighted scores on the x-axis and the EFE total weighted scores on the y-axis. Recall that each
division of an organization should construct an IFE Matrix and an EFE Matrix for its part of the
organization. The total weighted scores derived from the divisions allow construction of the corporate-
level IE Matrix. On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a
weak internal position; a score of 2.0 to 2.99 is considered average; and a score of 3.0 to 4.0 is strong.
Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is considered low; a score of 2.0 to
2.99 is medium; and a score of 3.0 to 4.0 is high.

IFE is an important matrix of matching stage of strategy formulation. This matrix already explains earlier.
It relate to internal (IFE) and external factor evaluation (EFE). The findings from internal and external
position and weighted score plot on it. It contains nine cells. Its characteristics is a s follow

 Positions an organization‘s various divisions in a nine-cell display.

 It is based on two key dimensions
 The IFE total weighted scores on the x-axis
 The EFE total weighted scores on the y-axis
 It is divided into three major regions
 Grow and build – Cells I, II, or IV
 Hold and maintain – Cells III, V, or VII
 Harvest or divest – Cells VI, VIII, or IX

Figure 5.6

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The Grand Strategy Matrix

In addition to the SWOT Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the Grand Strategy Matrix
has become a popular tool for formulating alternative strategies. All organizations can be positioned in
one of the Grand Strategy Matrix‘s four strategy quadrants. A firm‘s divisions likewise could be
positioned. As illustrated in Figure 5.6, the Grand Strategy Matrix is based on two evaluative dimensions:
competitive position and market (industry) growth. Any industry whose annual growth in sales exceeds 5
percent could be considered to have rapid growth. Appropriate strategies for an organization to consider
are listed in sequential order of attractiveness in each quadrant of the matrix. Firms located in Quadrant I
of the Grand Strategy Matrix are in an excellent strategic position. For these firms, continued
concentration on current markets (market penetration and market development) and products (product
development) is an appropriate strategy. It is unwise for a Quadrant I firm to shift notably from its
established competitive advantages. When a Quadrant I organization has excessive resources, then
backward, forward, or horizontal integration may be effective strategies. When a Quadrant I firm is too
heavily committed to a single product, then related diversification may reduce the risks associated with a
narrow product line. Quadrant I firms can afford to take advantage of external opportunities in several
areas. They can take risks aggressively when necessary.

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FIGURE 5.7

The Grand

Quadrant II Quadrant I
1. Market development 1. Market development
2. Market penetration 2. Market penetration
3. Product development 3. Product developmen
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversifica
RAPID MARKET GROWTH
Quadrant III Quadrant IV
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Liquidation

Strategy Matrix

The Decision Stage

Analysis and intuition provide a basis for making strategy-formulation decisions. The matching
techniques just discussed reveal feasible alternative strategies. Many of these strategies will likely have
been proposed by managers and employees participating in the strategy analysis and choice activity. Any
additional strategies resulting from the matching analyses could be discussed and added to the list of
feasible alternative options. As indicated earlier in this chapter, participants could rate these strategies on
a 1 to 4 scale so that a prioritized list of the best strategies could be achieved.

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The Quantitative Strategic Planning Matrix (QSPM)

Table 5.2

Strategy 1 Strategy 2 Strategy 3 Key Internal Factors

Management
Marketing
Finance/Accounting
Production/Operations
Research and
Development
Computer Information
Systems
Sum total A.S.

STRONG
COMPETITIV
E
POSITION

Other than ranking strategies to achieve the prioritized list, there is only one analytical technique in the
literature designed to determine the relative attractiveness of feasible alternative actions. This technique is
the Quantitative Strategic Planning Matrix (QSPM), which comprises Stage 3 of the strategy-formulation
analytical framework. This technique objectively indicates which alternative strategies are best. The
QSPM uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively

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among alternative strategies. That is, the EFE Matrix, IFE Matrix, and Competitive Profile Matrix that
make up Stage 1, coupled with the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand
Strategy Matrix that make up Stage 2, provide the needed information for setting up the QSPM (Stage 3).
The QSPM is a tool that allows strategists to evaluate alternative strategies objectively, based on
previously identified external and internal critical success factors. Like other strategy-formulation
analytical tools, the QSPM requires good intuitive judgment. The basic format of the QSPM is illustrated
in Table 5-3. Note that the left column of a QSPM consists of key external and internal factors (from
Stage 1), and the top row consists of feasible alternative strategies (from Stage 2). Specifically, the left
column of a QSPM consists of information obtained directly from the EFE Matrix and IFE Matrix. In a
column adjacent to the critical success factors, the respective weights received by each factor in the EFE
Matrix and the IFE Matrix are recorded. The top row of a QSPM consists of alternative strategies derived
from the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These
matching tools usually generate similar feasible alternatives. However, not every strategy suggested by
the matching techniques has to be evaluated in a QSPM. Strategists should use good intuitive judgment in
selecting strategies to include in a QSPM.

Conceptually, the QSPM determines the relative attractiveness of various strategies based on the extent to
which key external and internal critical success factors are capitalized upon or improved. The relative
attractiveness of each strategy within a set of alternatives is computed by determining the cumulative
impact of each external and internal critical success factor. Any number of sets of alternative strategies
can be included in the QSPM, and any number of strategies can make up a given set, but only strategies
within a given set are evaluated relative to each other. For example, one set of strategies may include
diversification, whereas another set may include issuing stock and selling a division to raise needed
capital. These two sets of strategies are totally different, and the QSPM evaluates strategies only within
sets. Note in Table 6-6 that three strategies are included, and they make up just one set. A QSPM for a
retail computer store is provided in Table 6-7. This example illustrates all the components of the QSPM:
Strategic Alternatives, Key Factors, Weights, Attractiveness Scores (AS), Total Attractiveness Scores
(TAS), and the Sum Total Attractiveness Score. The three new terms just introduced—(1) Attractiveness
Scores, (2) Total Attractiveness Scores, and (3) the Sum Total Attractiveness Score—are defined and
explained as the six steps required to develop a QSPM are discussed:

Step 1 Make a list of the firm‘s key external opportunities/threats and internal strengths/weaknesses in the
left column of the QSPM. This information should be taken directly from the EFE Matrix and IFE Matrix.
A minimum of 10 external key success factors and 10 internal key success factors should be included in
the QSPM.

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Step 2 Assign weights to each key external and internal factor. These weights are identical to those in the
EFE Matrix and the IFE Matrix. The weights are presented in a straight column just to the right of the
external and internal critical success factors.

Step 3 Examine the Stage 2 (matching) matrices, and identify alternative strategies that

the organization should consider implementing. Record these strategies in the top row of the QSPM.
Group the strategies into mutually exclusive sets if possible.

Step 4 Determine the Attractiveness Scores (AS) defined as numerical values that indicate the relative
attractiveness of each strategy in a given set of alternatives. Attractiveness Scores (AS) are determined by
examining each key external or internal factor, one at a time, and asking the question ―Does this factor
affect the choice of strategies being made?‖ If the answer to this question is yes, then the strategies should
be compared relative to that key factor. Specifically, Attractiveness Scores should be assigned to each
strategy to indicate the relative attractiveness of one strategy over others, considering the particular factor.
The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably
attractive, and 4 = highly attractive. By attractive, we mean the extent that one strategy, compared to
others, enables the firm to either capitalize on the strength, improve on the weakness, exploit the
opportunity, or avoid the threat. Work row by row in developing a QSPM. If the answer to the previous
question is no, indicating that the respective key factor has no effect upon the specific choice being made,
then do not assign Attractiveness Scores to the strategies in that set. Use a dash to indicate that the key
factor does not affect the choice being made. Note: If you assign an AS score to one strategy, then assign
AS score(s) to the other. In other words, if one strategy receives a dash, then all others must receive a
dash in a given row.

Step 5 Compute the Total Attractiveness Scores. Total Attractiveness Scores (TAS) are defined as the
product of multiplying the weights (Step 2) by the Attractiveness Scores (Step 4) in each row. The Total
Attractiveness Scores indicate the relative attractiveness of each alternative strategy, considering only the
impact of the adjacent external or internal critical success factor. The higher the Total Attractiveness
Score, the more attractive the strategic alternative (considering only the adjacent critical success factor).

Step 6 Compute the Sum Total Attractiveness Score. Add Total Attractiveness Scores in

each strategy column of the QSPM. The Sum Total Attractiveness Scores (STAS) reveal which strategy is
most attractive in each set of alternatives. Higher scores indicate more attractive strategies, considering all
the relevant external and internal factors that could affect the strategic decisions. The magnitude of the

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difference between the Sum Total Attractiveness Scores in a given set of strategic alternatives indicates
the relative desirability of one strategy over another.

Limitations of the QSPM

 Always requires intuitive judgments and educated assumptions

 Only as good as the prerequisite information and matching analyses upon which it is based.

A QSPM for a Retail

Computer Store

Table 5.3 A QSPM for a Retail Computer Store

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The Balanced Scorecard (BSC model)

Developed in 1993 by Harvard Business School professors Robert Kaplan and David Norton, and refined
continually through today, the Balanced Scorecard is a strategy evaluation and control technique.
Balanced Scorecard derives its name from the perceived need of firms to ―balance‖ financial measures
that are oftentimes used exclusively in strategy evaluation and control with nonfinancial measures such as
product quality and customer service. An effective Balanced Scorecard contains a carefully chosen
combination of strategic and financial objectives tailored to the company‘s business. As a tool to manage
and evaluate strategy, the Balanced Scorecard is currently in use at Sears, United Parcel Service, 3M
Corporation, Heinz, and hundreds of other firms. For example, 3M Corporation has a financial objective
to achieve annual growth in earnings per share of 10 percent or better, as well as a strategic objective to
have at least 30 percent of sales come from products introduced in the past four years. The overall aim of
the Balanced Scorecard is to ―balance‖ shareholder objectives with customer and operational objectives.
Obviously, these sets of objectives interrelate and many even conflict. For example, customers want low
price and high service, which may conflict with shareholders‘ desire for a high return on their investment.
The Balanced Scorecard concept is consistent with the notions of continuous improvement in
management (CIM) and total quality management (TQM). Although the Balanced Scorecard concept is
covered in more detail relates to evaluating strategies, note here that firms should establish objectives and
evaluate strategies on items other than financial measures. This is the basic tenet of the Balanced
Scorecard. Financial measures and ratios are vitally important. However, of equal importance are factors
such as customer service, employee morale, product quality, pollution abatement, business ethics, social
responsibility, community involvement, and other such items. In conjunction with financial measures,
these ―softer‖ factors comprise an integral part of both the objective-setting process and the strategy-
evaluation process. These factors can vary by organization, but such items, along with financial measures,
comprise the essence of a Balanced Scorecard. A Balanced Scorecard for a firm is simply a listing of all
key objectives to work toward, along with an associated time dimension of when each objective is to be
accomplished, as well as a primary responsibility or contact person, department, or division for each
objective.

Balanced scorecard is also a process that allows firms to evaluate strategies from four perspectives:
financial performance, customer knowledge, internal business processes, and learning and growth. The
Balanced Scorecard analysis requires that firms seek answers to the following questions and utilize that
information, in conjunction with financial measures, to adequately and more effectively evaluate
strategies being implemented:

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 1. How well is the firm continually improving and creating value along measures such as innovation,
technological leadership, product quality, operational process efficiencies, and so on?

2. How well is the firm sustaining and even improving upon its core competencies and competitive
advantages?

3. How satisfied are the firm‘s customers? A sample Balanced Scorecard is provided in Table 9-6. Notice
that the firm examines six key issues in evaluating its strategies: (1) Customers, (2) Managers/Employees,
(3) Operations/Processes, (4) Community/Social Responsibility, (5) Business Ethics/Natural
Environment, and (6) Financial. The basic form of a Balanced Scorecard may differ for different
organizations. The Balanced Scorecard approach to strategy evaluation aims to balance long-term with
short-term concerns, to balance financial with nonfinancial concerns, and to balance internal with external
concerns. It can be an excellent management tool, and it is used successfully today by Chemical Bank,
Exxon/Mobil Corporation, CIGNA Property and Casualty Insurance, and numerous other firms. The
Balanced Scorecard would be constructed differently, that is, adapted, to particular firms in various
industries with the underlying theme or thrust being the same, which is to evaluate the firm‘s strategies
based upon both key quantitative and qualitative measures.

TABLE 5-4: An Example Balanced Scorecard

Area of Objectives Measure or Target Time Expectation Primary Responsibility

Customers
_
_

Managers/Employees
_
_

Operations/Processes
_
_

Community/Social
Responsibility
_
_

Business Ethics/Natural
Environment
_
_

Financial
_
_

The 7’S-Model

The 7-S-Model is better known as McKinsey 7-S. This is because the two persons who developed this
model, Tom Peters and Robert Waterman, have been consultants at McKinsey & Co at that time. Thy

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published their 7-S-Model in their article ―Structure Is Not Organization‖ (1980) and in their books ―The
Art of Japanese Management‖ (1981) and ―In Search of Excellence‖ (1982). The model starts on the
premise that an organization is not just Structure, but consists of seven elements:

Figure 5. 6: The 7’S-Model

Weight

Key
Externa
l
Factors

Structur
e

Those
seven elements are distinguished as hard S‘s and soft S‘s. The hard elements (green circles) are feasible
and easy to identify. They can be found in strategy statements, corporate plans, organizational charts and
other documentations. The four soft S‘s elements (yellow circles), however, are hardly feasible. They are
difficult to describe since capabilities, values and elements of corporate culture are continuously
developing and changing. They are highly determined by the people at work in the organization.
Therefore it is much more difficult to plan or to influence the characteristics of the soft elements.
Although the soft factors are below the surface, they can have a great impact of the hard Structures,
Strategies and Systems of the organization.

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The Hard S’s

Strategy derives from assessment of organization internal Strengths & Weaknesses, and external
Opportunities & Threats (SWOT Analysis); includes environment influences; nature of competition;
company distinctive competencies; company key success factors. Strategy Actions a company plans in
response to or anticipation of changes in its external environment. Strategy is also the direction and scope
of the company over the long term. And also, strategy must be dynamic not static—responsive to the
internal and external environment.
Structure basis for specialization and co-ordination influenced primarily by strategy and by organization
size and diversity. Structure represents how the company is organized to execute strategy. Structure may
be centralized or decentralized. Structure may be ―flat‖& matrixed /organized in ―silo‘s‖. Structure should
be designed to facilitate achieving corporate vision, goals & strategies

Systems can be Formal and informal procedures that support the strategy and structure. (Systems are
more powerful than they are given credit)

1. Formal systems may include:

o Measurement systems (including planning)
o Performance management systems
o Resource allocation systems
2. Informal systems may include:
o Meeting formats
o Conflict resolution protocols

The Soft S’s

Style: is more a matter of what managers do than what they say; How do a company‘s managers spend
their time? What are they focusing attention on? Symbolism – the creation and maintenance (or
sometimes deconstruction) of meaning is a fundamental responsibility of managers.

o Style is the manner in which leaders and employees ―behave ―internally and externally
o Style is the manner in which the company interacts with stakeholders, customers,
regulators, etc

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Staff: The people/human resource management – processes used to develop managers, socialization
processes, ways of shaping basic values of management, ways of introducing young recruits to the
company, ways of helping to manage the careers of employees.

Staffing considerations may include: demographics makeup (diversity), selection criteria and
promotion factors, staff development programs & opportunities and culture within the
organization.
Skills: The distinctive competences – what the company does best, ways of expanding or shifting
competences.

 Skills differentiating characteristics of the company‘s products and services

 Skills describe the core competencies required by leaders and other categories of
employees in order for the company to effectively execute against the vision, values, goals
and strategies.
Shared Values /Superordinate Goals: is guiding concepts, fundamental ideas around which a business
is built – must be simple, usually stated at abstract level, have great meaning inside the organization even
though outsiders may not see or understands them. The organization should be pro-active to define the
corporate values and the desired behavior for leaders and employees consistent with these values. Values
and desired behavior must be communicated to and embraced by the entire organization

Effective organizations achieve a fit between these seven elements. This criterion is the origin of the other
name of the model: Diagnostic Model for Organizational Effectiveness. If one element is changes, then
this will affect all the other elements. For example, a change in HR-systems like internal career plans and
management training will have an impact on organizational culture (management style) and thus will
affect structures, processes, and finally characteristic competences of the organization. In change
processes, many organizations focus their efforts on the hard S‘s, Strategy, Structure and Systems. They
care less for the soft S‘s, Skills, Staff, Style and Shared Values. Peters and Waterman in ―In Search of
Excellence‖ commented however, that most successful companies work hard at these soft S‘s. The soft
factors can make or break a successful change process, since new structures and strategies are difficult to
build upon inappropriate cultures and values. These problems often come up in the dissatisfying results of
spectacular mega-mergers. The lack of success and synergies in such mergers is often based in a clash of
completely different cultures, values, and styles, which make it difficult to establish effective common
systems and structures.

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The 7-S Model is a valuable tool to initiate change processes and to give them direction. A helpful
application is to determine the current state of each element and to compare this with the ideal state.
Based in this it is possible to develop action plans to achieve the intended state.

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 Chapter Six
Strategic Implementation

Introduction
Strategic implementation is concerned with the execution of selected strategy/ies. It is the action
stage of strategic management process. There are three approaches to strategic implementation,
the structural implementation, functional implementation and behavioral implementation and all
are very critical for successful implementation of strategies. In this chapter, you learn about the
concepts related to strategic implementation and the three approaches of strategic
implementation.
After reading this chapter, you should be able to:
1. Identify the concepts of strategic implementation and factors that are causing
unsuccessful implementation of strategy
2. Identify major activities to done to implement the selected strategies
3. Identify and understand the three approaches of strategy implementation

6.1 The nature of strategy implementation

Successful strategy formulation does not guarantee successful strategy implementation. It is
always more difficult to do something (strategy implementation) than to say you are going to do
it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally
different from strategy formulation. Strategy formulation and implementation can be contrasted
in the following ways:
• Strategy formulation is positioning forces before the action.
• Strategy implementation is managing forces during the action.
• Strategy formulation focuses on effectiveness.
• Strategy implementation focuses on efficiency.
• Strategy formulation is primarily an intellectual process.
• Strategy implementation is primarily an operational process.
• Strategy formulation requires good intuitive and analytical skills.
• Strategy implementation requires special motivation and leadership skills.
• Strategy formulation requires coordination among a few individuals.

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• Strategy implementation requires coordination among many individuals.
Strategy-formulation concepts and tools do not differ greatly for small, large, for-profit, or
nonprofit organizations. However, strategy implementation varies substantially among different
types and sizes of organizations. Implementing strategies requires such actions as altering sales
territories, adding new departments, closing facilities, hiring new employees, changing an
organization‘s pricing strategy, developing financial budgets, developing new employee benefits,
establishing cost-control procedures, changing advertising strategies, building new facilities,
training new employees, transferring managers among divisions, and building a better
management information system. These types of activities obviously differ greatly between
manufacturing, service, and governmental organizations.
Management Perspectives
In all but the smallest organizations, the transition from strategy formulation to strategy
implementation requires a shift in responsibility from strategists to divisional and functional
managers. Implementation problems can arise because of this shift in responsibility, especially if
strategy-formulation decisions come as a surprise to middle- and lower-level managers.
Managers and employees are motivated more by perceived self-interests than by organizational
interests, unless the two coincide. Therefore, it is essential that divisional and functional
managers be involved as much as possible in strategy-formulation activities of equal importance,
strategists should be involved as much as possible in strategy-implementation activities.
Management issues central to strategy implementation include establishing annual objectives,
devising policies, allocating resources, altering an existing organizational structure, restructuring
and reengineering, revising reward and incentive plans, minimizing resistance to change,
matching managers with strategy, developing a strategy supportive culture, adapting
production/operations processes, developing an effective human resources function, and, if
necessary, downsizing. Management changes are necessarily more extensive when strategies to
be implemented move a firm in a major new direction. Managers and employees throughout an
organization should participate early and directly in strategy-implementation decisions. Their
role in strategy implementation should build upon prior involvement in strategy-formulation
activities. Strategists‘ genuine personal commitment to implementation is a necessary and
powerful motivational force for managers and employees. Too often, strategists are too busy to
actively support strategy-implementation efforts, and their lack of interest can be detrimental to

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organizational success. The rationale for objectives and strategies should be understood and
clearly communicated throughout an organization. Major competitors‘ accomplishments,
products, plans, actions, and performance should be apparent to all organizational members.
Major external opportunities and threats should be clear, and managers‘ and employees‘
questions should be answered. Top down flow of communication is essential for developing
bottom-up support.
Annual Objectives
Establishing annual objectives is a decentralized activity that directly involves all managers in an
organization. Active participation in establishing annual objectives can lead to acceptance and
commitment. Annual objectives are essential for strategy implementation because they (1)
represent the basis for allocating resources; (2) are a primary mechanism for evaluating
managers; (3) are the major instrument for monitoring progress toward achieving long-term
objectives; and (4) establish organizational, divisional, and departmental priorities. Considerable
time and effort should be devoted to ensuring that annual objectives are well conceived,
consistent with long-term objectives, and supportive of strategies to be implemented. The
purpose of annual objectives can be summarized as follows: Annual objectives serve as
guidelines for action, directing and channeling efforts and activities of organization members.
They provide a source of legitimacy in an enterprise by justifying activities to stakeholders. They
serve as standards of performance.

They serve as an important source of employee motivation and identification. They give
incentives for managers and employees to perform. They provide a basis for organizational
design. Clearly stated and communicated objectives are critical to success in all types and sizes
of firms. Annual objectives, stated in terms of profitability, growth, and market share by business
segment, geographic area, customer groups, and product, are common in organizations.
Objectives should be consistent across hierarchical levels and form a network of supportive aims.
Horizontal consistency of objectives is as important as vertical consistency of objectives. For
instance, it would not be effective for manufacturing to achieve more than its annual objective of
units produced if marketing could not sell the additional units.
Annual objectives should be measurable, consistent, reasonable, challenging, clear,
communicated throughout the organization, characterized by an appropriate time dimension, and

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accompanied by commensurate rewards and sanctions. Too often, objectives are stated in
generalities, with little operational usefulness. Annual objectives, such as ―to improve
communication‖ or ―to improve performance,‖ are not clear, specific, or measurable. Objectives
should state quantity, quality, cost, and time—and also be verifiable.
Terms and phrases such as maximize, minimize, as soon as possible, and adequate should be
avoided. Annual objectives should be compatible with employees‘ and managers‘ values and
should be supported by clearly stated policies. More of something is not always better. Improved
quality or reduced cost may, for example, be more important than quantity. It is important to tie
rewards and sanctions to annual objectives so that employees and managers understand that
achieving objectives is critical to successful strategy implementation. Clear annual objectives do
not guarantee successful strategy implementation, but they do increase the likelihood that
personal and organizational aims can be accomplished. Overemphasis on achieving objectives
can result in undesirable conduct, such as faking the numbers, distorting the records, and letting
objectives become ends in themselves. Managers must be alert to these potential problems.

Policies
Changes in a firm‘s strategic direction do not occur automatically. On a day-to-day basis,
policies are needed to make a strategy work. Policies facilitate solving recurring problems and
guide the implementation of strategy. Broadly defined, policy refers to specific guidelines,
methods, procedures, rules, forms, and administrative practices established to support and
encourage work toward stated goals. Policies are instruments for strategy implementation.
Policies set boundaries, constraints, and limits on the kinds of administrative actions that can be
taken to reward and sanction behavior; they clarify what can and cannot be done in pursuit of an
organization‘s objectives. For example, Carnival‘s Paradise ship has a no smoking policy
anywhere, anytime aboard ship. It is the first journey ship to ban smoking comprehensively.
Another example of corporate policy relates to surfing the Web while at work. About 40 percent
of companies today do not have a formal policy preventing employees from surfing the Internet,
but software is being marketed now that allows firms to monitor how, when, where, and how
long various employees use the Internet at work. Policies can apply to all divisions and
departments (for example, ―We are an equal opportunity employer‖). Some policies apply to a
single department (―Employees in this department must take at least one training and

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development course each year‖). Whatever their scope and form, policies serve as a mechanism
for implementing strategies and obtaining objectives. Policies should be stated in writing
whenever possible.

Resource Allocation
Resource allocation is a central management activity that allows for strategy execution. Strategic
management enables resources to be allocated according to priorities established by annual
objectives. Nothing could be more detrimental to strategic management and to organizational
success than for resources to be allocated in ways not consistent with priorities indicated by
approved annual objectives. All organizations have at least four types of resources that can be
used to achieve desired objectives: financial resources, physical resources, human resources, and
technological resources. Allocating resources to particular divisions and departments does not
mean that strategies will be successfully implemented. A number of factors commonly prohibit
effective resource allocation, including an overprotection of resources, too great an emphasis on
short-run financial criteria, organizational politics, vague strategy targets, a reluctance to take
risks, and a lack of sufficient knowledge. Below the corporate level, there often exists an absence
of systematic thinking about resources allocated and strategies of the firm. Yavitz and Newman
explain why:
Managers normally have many more tasks than they can do. Managers must allocate time and
resources among these tasks. Pressure builds up. Expenses are too high. The CEO wants a good
financial report for the third quarter. The real value of any resource allocation program lies in the
resulting accomplishment of an organization‘s objectives. Effective resource allocation does not
guarantee successful strategy implementation because programs, personnel, controls, and
commitment must breathe life into the resources provided.
Managing Conflict
Interdependency of objectives and competition for limited resources often leads to conflict.
Conflict can be defined as a disagreement between two or more parties on one or more issues.
Establishing annual objectives can lead to conflict because individuals have different
expectations and perceptions, schedules create pressure, personalities are incompatible, and
misunderstandings between line managers (such as production supervisors) and staff managers
(such as human resource specialists) occur. For example, a collection manager‘s objective of

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reducing bad debts by 50 percent in a given year may conflict with a divisional objective to
increase sales by 20 percent. Establishing objectives can lead to conflict because managers and
strategists must make trade-offs, such as whether to emphasize short-term profits or long-term
growth, profit margin or market share, market penetration or market development, growth or
stability, high risk or low risk, and social responsiveness or profit maximization. Trade-offs are
necessary because no firm has sufficient resources pursue all strategies to would benefit the firm.
Conflict is unavoidable in organizations, so it is important that conflict be managed and resolved
before dysfunctional consequences affect organizational performance. Conflict is not always bad.
An absence of conflict can signal indifference and lack of interest. Conflict can serve to energize
opposing groups into action and may help managers identify problems. Various approaches for
managing and resolving conflict can be classified into three categories: avoidance, diffusion, and
confrontation. Avoidance includes such actions as ignoring the problem in hopes that the conflict
will resolve itself or physically separating the conflicting individuals (or groups). Diffusion can
include playing down differences between conflicting parties while accentuating similarities and
common interests, compromising so that there is neither a clear winner nor loser, resorting to
majority rule, appealing to a higher authority, or redesigning present positions. Confrontation is
exemplified by exchanging members of conflicting parties so that each can gain an appreciation
of the other‘s point of view or holding a meeting at which conflicting parties present their views
and work through their differences.

Matching Structure with Strategy

Changes in strategy often require changes in the way an organization is structured for two major
reasons. First, structure largely dictates how objectives and policies will be established. For
example, objectives and policies established under a geographic organizational structure are
couched in geographic terms. Objectives and policies are stated largely in terms of products in an
organization whose structure is based on product groups. The structural format for developing
objectives and policies can significantly impact all other strategy-implementation activities. The
second major reason why changes in strategy often require changes in structure is that structure
dictates how resources will be allocated. If an organization‘s structure is based on customer
groups, then resources will be allocated in that manner. Similarly, if an organization‘s structure is
set up along functional business lines, then resources are allocated by functional areas. Unless

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new or revised strategies place emphasis in the same areas as old strategies, structural
reorientation commonly becomes a part of strategy implementation.
Changes in strategy lead to changes in organizational structure. Structure should be designed to
facilitate the strategic pursuit of a firm and, therefore, follow strategy. Without a strategy or
reasons for being (mission), companies find it difficult to design an effective structure. Chandler
found a particular structure sequence to be repeated often as organizations grow and change
strategy over time. There is no one optimal organizational design or structure for a given strategy
or type of organization. What is appropriate for one organization may not be appropriate for a
similar firm, although successful firms in a given industry do tend to organize themselves in a
similar way. For example, consumer goods companies tend to follow the divisional structure- by-
product form of organization. Small firms tend to be functionally structured (centralized).
Medium-sized firms tend to be divisionally structured (decentralized). Large firms tend to use a
strategic business unit (SBU) or matrix structure. As organizations grow, their structures
generally change from simple to complex as a result of concatenation, or the linking together of
several basic strategies.

Numerous external and internal forces affect an organization; no firm could change its structure
in response to every one of these forces, because to do so would lead to chaos. Structure can
shape the choice of strategies. But a more important concern is determining what types of
structural changes are needed to implement new
Symptoms of an Ineffective Organizational Structure:
1. Too many levels of management
2. Too many meetings attended by too many people
3. Too much attention being directed toward solving interdepartmental conflicts
4. Too large a span of control
5. Too many unachieved objectives
6. Declining corporate or business performance
7. Losing ground to rival firms
8. Revenue and/or earnings divided by number of employees and/or number of managers is low
compared to rival firms

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 6.2. Key concepts in strategy implementation
In a simple way, strategy implementation can be defined as a process through which a chosen
strategy is put into action. Though this definition is very simple but does not specify what action
are required in strategy implementation. To elaborate the issues and activities involved in
strategy formulation, let us consider other definitions. Steiner et al have defined strategy
implementation as: ―The implementation of policies and strategies is concerned with the design
and management of systems to achieve the best integration of people, structures, processes, and
resources, in reaching organizational purposes.‖ According to McCarthy et al strategy
implementation may be said to consist of securing resources, organizing these resources and
directing the use of these resources within and outside the organizations.
Strategic implementation is concerned with execution of selected strategies. It involves
operationalizing the strategies, preparation of annual objectives, functional strategies and
business policies. Organizational successful at strategy implementation effectively manage six
key supporting factors: (1) Action planning; (2) organization structure; (3) human resource; (4)
the annual business plan; (5) monitoring and control; and (6) linkage.

6.3. Factors causing unsuccessful implementation of strategy

Before going into the details of how a chosen strategy is implemented, it is desirable to identify
the factors which cause unsuccessful implementation of strategy so that managers can take
adequate safeguard against these, factors. The major factors for unsuccessful implementation of
strategy include:
1. Unsatisfactory coupling of strategy and operational actions.
2. Insufficient attention to the negotiation of outcomes in decision situations, and
3. Defective strategy.
1. Unsatisfactory Coupling of Strategy and Actions
Unsatisfactory coupling of the strategy to the actions necessary to implement it, both within the
organization and in the external decision situations with which it is concerned may cause
unsuccessful implementation of the strategy. This type of difficulty can result from a number of
causes and conditions. For example, unsatisfactory coupling of the new strategy may be due to
the lack of explicit decoupling from previous strategy and commitment within the organization
itself. This decoupling may be caused, in turn, by the existence of a sizable group of people

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within the organization who are convinced that the new strategy is not practical and that the
previous ways and activities are best. Another factor responsible for this unsatisfactory coupling
may be misperceptions by the strategist of the impact of the newly proposed initiatives on the
organization and its people. It is sometimes assumed that the new initiatives will be accepted by
the organization with a minimum of time and effort from all those who are involved. In actual
practice, however, much more work is necessary to ensure that the strategy is accepted and
implemented than to prepare it in the first instance. Another reason for unsuccessful coupling
may be because of different perspective of strategists and implementers. In most cases, majority
of people are concerned with the current operations. Their primary task is to ensure that these
operations are conducted smoothly and efficiently. Their perspective is involved with the
avoidance of change and of other factors that could interfere with the operations in their area of
responsibility. Strategists, on the other hand, seek out changes and determine whether it can be
used to the advantage of the organization. These different perspectives can result in the two
groups becoming alienated from each other. For successful implementation of the strategy, a link
between these two groups is necessary.
2. Insufficient Attention
Another major factor causing unsuccessful implementation of the strategy is insufficient attention
to the negotiation of outcomes in the external decision situations. It is a tendency to assume, once
the strategy is formulated, that all that is necessary for the success of the organization is the
aggressive pursuit of the strategy. However, this assumption holds good only as long as there is
no change in the decision situations. If these situations change, there should be corresponding
change in the strategy also. For this, it is essential that the structure of the strategic decision
situations in which the organization is involved should be kept clearly in view throughout the
implementation. If this is done, changes in the conditions surrounding those decision situations
can be taken in stride. Contingency strategy made during the strategy formulation process can be
brought into operation when appropriate.
3. Defective Strategy
Sometimes, there may be strategy which cannot be implemented within the context of present
and future organizational resources. Perhaps, every one of us may be aware about ‗who will bell
the cat‘. The story goes like this. Worried with the sudden attack of the cat, a community of rats
called a meeting to overcome this problem. In the meeting, an elder rat suggested, ―bell the cat so

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that whenever she comes, we shall escape on hearing the sound of the bell.‖ On this, a younger
rat asked, ―who will bell the cat ? Pat came the reply from the elder rat, ―strategic decision
making is my role implementation is yours‖. Though this a jest side of the situation, many
organizations follow this pattern in their strategy formulation and implementation process. The
net result is that either strategy is denounced half way or put in cold storage incurring loss in both
the situations. Therefore, strategic choice should always be correlated with the organizational
capability to implement it. While implementing a strategy, the above factors should be taken into
account and various tools of strategy implementation should be selected carefully to ensure
effective implementation.

6.4. Activating Strategy

Activation is the process of stimulating an activity -so that it is undertaken effectively. Activation
of strategy is required because only a very small group of people is involved in strategy
formulation while its implementation involves a large number of people in the organization. So
long as a strategy is not activated, it remains in the mind of strategists. Activation of a strategy or
set of strategies requires the performance of following activities:
1. Institutionalization of strategy,
2. Formulation of derivative-plans and programs,
3. Translation of general objectives into specific objectives, and
4. Resource mobilization and allocation.
1. Institutionalization of Strategy
The first basic role of the strategist in strategy implementation is the institutionalization of the
strategy. Since strategy does not become either acceptable or effective by virtue of being well
designed and clearly announced, the successful implementation of strategy requires that the
leader acts as its promoter and defender. Often what happens is that leader‘s role is quite
prominent in strategy formulation and his personality variables become influential factors in the
strategy formulation. Thus, in practice, it becomes almost personal strategy of the top man in the
organization. Therefore, there is an urgent need for the institutionalization of the strategy because
without it, the strategy is subject to being undermined. Institutionalization of strategy involves
two elements: (1) communication of strategy to organizational members and (2) getting
acceptance of strategy by these members.

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A. Strategy Communication
The role of a strategist is not only to make the fundamental analytical and entrepreneurial
decisions, but also to present these to the members of the organization in a way that appeals to
them and brings their support. Thus, in order to get the strategy accepted and, consequently,
implemented requires its communication.
The form of communication may be oral through the interaction among strategist and other
persons, particularly at higher level in meetings or in other ways of personal interaction.
However, for a large organization with multi-locational units, such a form of communication
may not be adequate, and well documented written form may be required. Such a document may
contain (i) the context in which the particular strategy has been formulated like organizational
mission and objectives, environmental variables, and organizational variables: (ii) contents of the
strategy such as the contribution of the strategy to the achievement of organizational objectives,
changes required in existing organizational processes, and what is expected from personnel at
different levels in the organization.
B. Strategy Acceptance
It is not just sufficient to communicate the context and content of a strategy but to get the willing
acceptance of those who are responsible for its implementation. This will make organizational
members to develop a positive attitude towards the strategy. This helps them to make
commitment to strategy by treating it their own strategy than imposed by others. Creation of such
a feeling is essential for the effective implementation of the strategy. A major problem in strategy
acceptance is that people often resist a strategy, particularly when it makes significant departure
from the old-established practices. The basic reason of resistance emerges from the feeling that
the new way of doing things will put them in some adverse situation. For example, many of the
modernization strategies have been opposed by trade unions because of their perception that
these would put additional work load on their members or there may be job cuts. Many of the
disinvestment and divestment strategies have also been opposed by employees of all sorts and
these strategies could not be implemented in many cases. Here it may be important to note that
strategy acceptance is a pre-requisite for effective implementation.
2. Formulation of Derivative Plans and Programs

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Once the strategy is institutionalized through its communication and acceptance, the organization
may proceed to formulate action plans and programs. Since these plans and programs are derived
from a strategic choice (strategic plan), these are known as derivative plans and programs.
A. Action Plans
Action plans target at the most effective utilization of resources in an organization so that
objectives are achieved. These action plans may be of several types like plan for procuring a new
plant, developing a new product, and so .on. What types of action plan will be formulated in the
organization would depend on the nature of its strategy under implementation, for example,
action plans in a takeover strategy would be different from expansion through undertaking green-
field projects. However, while formulating action plans, follow-questions should be put so that
action plans contribute positively in strategy implementation:
1. How does the particular action plan contribute to the objectives of the strategy?
2. When will the activities devised under an action plan be undertaken?
3. Who will perform the activities?
4. What support will be needed to perform those activities?
B. Programs
A program is a single-use plan that covers relatively a large set of activities and specifies major
steps, their order and timing, and responsibility for each step. There may be several programs in
an organization; some of them being major, others being minor. These programs are generally
supported by necessary capital and operating budgets. For example, in the case of a takeover
strategy, two types of costs are involved: price to be paid for takeover and operating cost
involved in takeover process. Further, the activities of takeover are identified and sequence and
timing of performance of these activities are also determined so that takeover program is
completed well in time. Since there may be various programs involved in the implementation of
a strategy, these should be well coordinated so that each of them contributes positively to others.
3. Translating general Objectives into Specific Objectives
General organizational objectives are broad nature. They provide direction for action on
continuous basis. However, these objectives are too general and, sometimes, intangible to be
transformed into action. In order to make these operations, managers determine specific
objectives within the framework of general objectives, which the organization and its various
units will seek to achieve within a specific period. For example, growth is one of the vital

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objectives of every organization. This provides direction for undertaking various activities
through which growth can be achieved.
However, this is very general and does not provide clue about how much growth in what period
of time. In order to overcome this problem, organizations set specific objectives to be achieved in
a specified time. A specific objective provides sharp focus on the activities that may be
undertaken to achieve extent of growth. Most of the specific objectives tend to be of short range
in character and have definite time limits within which the organization has to achieve these.
Translation of general objectives into specific and operative objectives must fulfill two criteria.
1. Translation of general objectives into specific objectives should be tangible and meaningful.
As far as possible, these objectives should be easily measurable as organizational performance is
measured against these objectives. It should be made SMARTER.
2. Specific objectives should contribute to the achievement of general objectives. In fact, time-
bound objectives are set to make the achievement of general objectives more feasible. For
example, long-term objectives involving plans for the distant future may fail to make individual
objectives tangible and meaningful standards for control. This can be overcome by setting
specific objectives at different stages of general long-term objectives.
4. Resource mobilization and allocation
For implementing a strategy, an organization should have commensurate resources and these
resources should be committed and allocated to various units and functions where these have
optimum use. There are different types of organizational resources and each of these has specific
nature and characteristics. These resources are broadly classified into two broad categories:
human and non- human (include financial, material, information, and time resources). These
resources are the means by which an organization produces goods and services of value through
conversion process. The success of the organization depends on the quality of its resources and
their utilization. Therefore, the organization should feel concerned about how to mobilize
resources and allocate these to various units and subunits.
A. Resources
It might be said that resources represent those assets, both tangible and intangible, with which the
company has to work: its assets, including its people, and the value of its brand, a variety of
individual, social, and organizational phenomena. To put it more concisely, resources represent

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inputs into a company‘s production process, such as capital equipment, the skills of individual
employees, brand names, financial resources, and talented managers.
By themselves, or individually, resources generally will not enable a company to achieve a
competitive advantage. They must be combined or integrated with other company resources to
establish a capability. When these capabilities are identified and nurtured, they can result in core
competencies, which may lead to a competitive advantage. A company‘s resources can be
classified either as tangible or intangible.
Tangible resources are assets that can be seen or quantified (such as plants), touched (such as
equipment), documented (such as contracts with suppliers of raw materials), or quantified (such
as the value of a specific asset). Generally tangible resources will not, by themselves, represent
capabilities that will serve as sources of core competencies. However, they still have value and
will contribute to development of capabilities and core competencies. It is interesting to note that
tangible resources may be less valuable today than they were in the past. To support this
conclusion, economist John Kendrick has found intangible assets to have contributed
increasingly to US economic growth since the early 1900s. The ratio of intangible business
capital to tangible business capital in 1929 was 30 per cent to 70 per cent, but that ratio was 63
per cent to 37 per cent in 1990.
A company‘s intangible resources may be less visible, but they are no less important. In fact they
may be more important if a company expects to achieve a competitive advantage. Intangible
resources range from innovation resources, such as knowledge, trust, and organizational routines,
to the company‘s people dependent or subjective resources of know-how, networks,
organizational culture, to the company‘s reputation for its goods and services and the way it
interacts with others (such as employees, suppliers, or customers). Three primary classifications
of intangible resources are:
• Human resources, such as knowledge, trust, and managerial capabilities
• Innovation resources, such as scientific capabilities and capacity to innovate
• Reputational resources, such as the company‘s reputation with customers or suppliers
The strategic value of tangible and intangible resources is indicated by the degree or extent to
which the resource(s) contribute to the development of capabilities, core competencies, and
ultimately, to a competitive advantage for the company. This is another way of saying that a

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single resource, tangible or intangible, has strategic value only if, in combination with other
resources, a capability is established.
The relationship is pretty straightforward. Resources are the source of company capabilities,
capabilities are the source of core competencies, and core competencies are the foundation for
achieving a competitive advantage and strategic competitiveness.
Because they cannot be quantified, touched, or seen, and are more difficult to explain, intangible
resources are more likely to be sources of sustainable competitive advantage. And, if they also
are difficult for competitors to identify and/or understand, they also may represent the most likely
source(s) of a company‘s capabilities, core competencies, and sustained competitive advantage.
It is important to remember that resources, both tangible and intangible, represent the primary
sources that enable a company to establish capabilities, the capacity for a set or bundle of unique
resources to interactively perform a task or activity. In other words, individual resources alone,
while they may have some value, will contribute to the development of capabilities only when
they are put together in unique combinations to provide the foundation for core competencies and
the establishment of competitive advantage.

6.5. Approaches of strategy implementation

There are three approaches of strategy implementation. These are structural implementation,
functional implementation and behavioral implementation. All of the approaches have to be
done with greater attention to achieve the intended strategic goals. Each of strategy
implementation is discussed here under.
6.5.1. Structural implementation
Structural implementation of strategy involves designing of organization structure and
interlinking various units and subunits of the organization created as a result of the organization
structure. Organization structure is the pattern in which the various parts of the organization are
interrelated or interconnected. Thus, it involves such issues as to how the work of the
organization will be divided and .assigned among various positions, groups, departments,
divisions, etc. and the coordination, necessary to accomplish organizational objectives will be
achieved. Thus, there are two aspects of organizational design: differentiation and integration.
Differentiation refers to ‗the differences in cognitive and emotional orientations among managers
in different functional departments‘, and integration refers to ‗the quality of the state of

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collaboration that are required to achieve unity of efforts in the organization. Therefore, the
organization must emphasize on both the aspects: it must design organization structure and
provide systems for interaction and coordination among organizations parts and members.
6.5.1.1. Strategy-Structure Relationship
There is close relationship between an organization‘s strategies and its structure. The
understanding of this relationship is important so that in implementing the strategy, the
organization structure is designed according to the needs of the strategy. The relationship
between strategy and structure can be thought in terms of utilizing structure -for strategy
implementation because structure is a means to an end and not an end in itself. The master
appropriate end is the objectives for which the organization exists in the first place, as revealed
by its strategy.
Without coordination between strategy and structure, the most likely outcomes are confusion,
misdirection, and splintered efforts within the organization. Research evidence also suggests that
structure follows strategy. According to Chandler, changes in organizations strategy bring about
new administrate problems which, in turn, require a new refashioned structure if the new strategy
is to be successfully implemented. Chandler has found structure tends to follow the growth
strategy of the organization but not until inefficiency and internal operating problems provoke a
structural adjustment. Thus organizational actions proceed in a particular sequence new strategy
creation, emergence of new administrative problems, a decline in portability and performance, a
shift to a more appropriate organization structure, then recovery to improved strategy execution
and more profit and performance. However, this sequence can be broken if suitable organization
structure is conceived at the starting point of strategy implementation.

The relationship between strategy and structure, however, should not be viewed merely as one-
way traffic; rather it should be viewed as two-way traffic. On one hand, the structure should be
according to the need the strategy so that it is implemented effectively. On the other hand,
structure of the organization may play a critical role in influencing its choice of strategy.
Recognition of this two-way interaction between strategy and structure is crucial for a complete
understanding of the criteria which underlie structural design. It becomes obvious that a top
management perspective in structural design is necessary when one understands that such a

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design is a result of overall strategy, and the success of the strategy is also dependent on that
design.

The close association of structure with strategy suggests that the organization should relate its
structure with its strategy. It should design the structure according to the needs of the strategy
for- its effective implementation. Without coordination between strategy and structure, the most
likely outcomes are confusion misdirection, and splintered efforts within the organization. The
structure is a means to implement a particular strategy and, therefore, the good structure is one
which best fits with the strategy. In evaluating whether the structure is designed properly to meet
the needs of the strategy, two questions can be posed:
1. What functions and activities should be performed for the success of the strategy?
2. Is structure adaptable to the pressure of the external environment?

The answer of these two questions should point exactly at the functions essential to strategic
success. However, in applying the test of consistence of strategy and structure, the strategist
frequently meets three difficult. First, as he attempts to relate structure to strategy, he/she may
find the strategy unclear, emerging. The basic question that should be put for answer before
diagnosing the structural adequacy is: how definite is the strategy? If the answer to this question
is uncertain, how does a manager test the adequacy of his organization structure? Therefore, if
the strategy is precise, clear and definite, the adequacy of organization structure can be tested
easily.

Second difficulty results from the fact that symptoms of organizational malfunctions are not
always explicit unlike the physical object. Things are to be interpreted on the basis of various
qualitative factors which may become subjective. It is a common human tendency to cover up
unpleasant things and organizational situations fall in this category. Therefore, the strategist has
to build up his/her information system in such a way that he is able to monitor organizational
adequacy.

Third problem in applying the test of adequacy is that malfunctioning symptoms have multiple
causes. Many of external factors may cause malfunctioning in the organization and not the

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structure itself. For example if the profit is down because of increased competition and
consequence -lower price realization, the correction will be required in strategic posture and the
organization should be analyzed in the context of both internal well as external factors to
pinpoint the exact nature of problem and consequently the remedial action. These problems must
be kept in mind -while relating structure to strategy.
6.5. 1.2. Mechanism for Relating Structure to Strategy
The first aspect of structure-strategy fit relates to the type of functions that the organization
structure should facilitate to perform. There are tests which any good organization structure
should satisfy. First to implement the strategy properly, certain functions must be performed.
Therefore, the structure should ensure that all the necessary activities are performed and there is
no duplication in the performance of the -activities. Second, an activity‘s contribution to strategy
should determine its rank and placement in the organizational hierarchy. Thus key activities
should never be subordinated to non-key activities. Revenue earning or result-producing
activities should never subordinate to support activities. By making success causing for the major
building blocks for the structure, the chances are greatly improved that strategy will be
effectively implemented.

The second aspect of structure-strategy fit relates to the adaptive character of the environmental
pressure on the organization. Organization has to interact continuously with its environment and
this interaction some sort of changes are brought continuously in the organization. If the change
is a minor one and comes within the purview of established programs of action, the change will
be absorbed within the system; major or rapid changes throw the organization out of equilibrium
seriously affecting its functioning. New equilibrium is reached by taking new programs.
Therefore, the organization structure should be able absorb these changes.

In relating structure to strategy, following strategic principles organizing may be helpful. These
principles are not strictly in accordance with traditional principles of organizing. These principles
are considered be especially pertinent for a firm with multiple products and multiple industry
market opportunities. These should also suit the smaller but growing firms in a dynamic volatile
environment.

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1. To the extent duplication and expense can be avoided. It is highly desirable to relate
significant areas of authority and responsibility to results desired with given markets, industries,
or sets of customers. Organization by market can produce the highest degree of strategic
awareness.
2. It is better to delegate authority and decentralize strategic planning and operations for
businesses which are relatively mature, predictable, and stable. This frees top management for
strategic planning in the relatively unknown areas of opportunities.
3. Strategic planning for the unknown areas should be centralized as this requires close
supervision of top management. The critical early choices in unknown fields can pose major
unpredictable risks on resource allocations and technological commitments which are among the
most important decision areas for the management.
4. In centralization-decentralization continuum, there should be centralized measurements. This
implies after-the-fact measurement and not the control which is affected by the divisional heads.
5. Emphasis should be on result-centered rather than profit centered decentralization. It is not
necessary to effect total profit and loss divisionalization in order to delegate decision making
authority‘ to lower echelon managers. Decentralization can be confined to those key operating
and support areas that have within their make-up tradeoff issues which a subordinate manager
can resolve to affect timely and market knowledgeable strategic decisions. In other words,
neither centralization nor decentralization are cut and dried propositions. Many graduations are
available to resourceful management, and entrepreneurial type of responsibilities can be assigned
with significant leverage for achieving results without handing over complete profit
responsibility. Various forms of organization structure and their suitability to strategies suggest
that no one form is suitable for all situations. Therefore, many companies opt for combination of
more than one form.

If the present organization structure does not adequately fit the need of chosen strategy in the
light of the above strategy structure fit and strategic principles of organizing, top management
should look for reorganization. Many companies have reorganized their structures recently
because of the change in their strategies due to the following factors:
1. Rapid growth leading to problems of manageable size and communication;
2. Excessive diversification of product lines;

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3. Increasing competition and environmental changes;
4. Changes in managerial styles particularly from centralized family decisions to decentralized
decision making;
5. Change in organizational climate and managerial commitments; and
6. Unsatisfactory work performance because of structural conflicts.
However, before taking reorganization, it is constructive for management to check off the
following questions to ensure whether the firm can function efficiently without the
reorganization:
1. Has firm clarified its n1ission and responsibilities to all concerned under- the existing
structure?
2. Are there significant opportunities for improved direction and motivation in day-to-day
operations?
3. Can procedures and practices be improved within the existing structure?
4. Should any key personnel reassignments be made?
5. Having exhausted the above, what, if any, organizational changes should be made?

If the change is required, it should be total package of articulated and efficient structure, effective
back-up systems, and motivated people dimensions. Initially, the process reorganization was the
responsible of line management, usually the chief executive. It was, therefore, a highly intuitive
process largely inspired by management‘s desire to solve certain existing problems, make key
personnel changes, or take up the fad of the time. However, the trend has channel. Now most of
the large organizations have either organization development department or take the help of
external consultants because the emphasis is on planned change. Since the organization is a
complex system of mutually dependent parts, it is logical that organizational change involves an
alteration or modification of one or more parts of the system. Thus what is needed is an
operational scheme of organization of parts so that the focus and the direction of the change
sought may be clearly identified for any given situation and the extended and interactive effects
of a change in anyone part of the system or on the other parts may be anticipated and traced.
Thus structural reorganization should be in the context of other interactive subsystems of the
organization, viz. technology, behavioral, technical and procedural, goals and values, and

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managerial. Therefore, mere restructuring of organizational relationships is not sufficient but an
integrated approach is required.
6.5.2. Functional implementation
Functional implementation deals with the development of policies and plans in different areas of
functions which an organization undertakes. Every business organization is built around
production function, marketing function, finance function and personne1 function. Thus, an
organization has to formulate policies and plans in these functions to implement its strategy
successfully.
6.5.2.1. Functional Policies and Plans
Integrated strategic planning system has significant dimension that coordinates the various plans
from the top level of the organization down through the lower levels. Such plans are coordinated
at different levels so that planning efforts at a lower level contribute to the higher level efforts.
Thus, integration of various functions, their plans and efforts leads to effective implementation of
strategy. The integration can be achieved if various functional plans are derived directly from
strategic plans and that too at the level of their formulation. However, this may not always
happen, particularly in the absence of proper guidelines. For, an organization is a growing
concern whose operational patterns have already been established which may not contribute to
the type of integration needed at various levels.

Further, the functional plans are prepared by almost at any level of the organization. For
example, the marketing manager develops overall marketing objectives, policies, action
programs, budget, etc. His subordinates, in turn, develop supporting marketing plans covering
each area of marketing operation-distribution, sales promotion, marketing plan which are
incorporated into overall plan of the organization. Similar exercises are done in other functional
areas which are incorporated into master plan for implementation. At all these levels,
coordination is necessary which is not achieved automatically but through the development of
policies.

Policies are guides to action. They are in the form of specific statements or general understanding
which provides guidance in decision making to members in respect of any course of action. They
indicate how the task assigned to the organization might be accomplished and provide a basis for

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lower level managers on which to make decisions about the use of resources which have been
allocated. But a policy does not tell the managers how to handle a specific activity; it is only a
general guide to action. It limits the choices of managers in most cases but it does not limit them
entirely.
Difference between Policy and Procedure
Before we proceed to the discussion of development of functional policies, it is desirable to make
a comparison of policy and procedure. A procedure is a series of related tasks that make up the
chronological sequence and the established way of performing the work to be accomplished.
Thus, a procedure provides guidelines to organizational members about how to accomplish a
work. A policy also provides guidelines for actions. Thus, there is a likelihood that confusion
arises between policy and procedure as both provide guidelines for future course of action.
However, this guiding aspect is different in policy and procedure. The major difference between
the two can be identified as follows:
1. Policy provides guidance for managerial thinking as well as action. As a result, it does not
tell a manager, how to do the things; it merely channels his decision-making along a particular
line by eliminating his span of consideration. On the other hand, a procedure simply provides
guidelines to the action by prescribing how an action can be performed step by step.
2. A policy is more flexible as compared to a procedure. Policy is more flexible because it
prescribes the areas of discretion to managers, while procedure prescribes the exact sequence of
the activities without scope of any variation. This difference between policy and procedure may
be understood by an example. An organization may have a policy‘ of granting vacation to its
employees. For implementing this policy, certain procedure may be followed through which an
employee may get leave and related benefits. A manager can refuse the leave to the employee
concerned depending on the organizational situation. But the employee will have to follow
certain procedure of applying for leave, completion of certain formalities to avail the benefits if
leave is granted.
3. Policy is more pronounced at higher levels while procedures are more prevalent at lower
levels. At higher levels, managers are more concerned with looking into the totality of the
organizational functioning and, therefore, they should prescribe policies so that uniformity is
maintained for particular action. People at lower levels are engaged mostly in routine work which
can be better accomplished if the set standards are prescribed without leaving‘ any scope of

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discretion. Since external situations play more important role in policy formulation and its
implementation, managers at higher levels have to make many decisions which are not similar to
the previous ones. Therefore, they have authority to vary an action according to the needs. At
lower levels, no such problems arise.
6.5.2.2. Role of Functional Policies and Plans
Functional policies play important role in strategy implementation. A functional policy is
formulated basically to control and reinforce implementation of functional strategies and also the
corporate strategy. Control and reinforcement of strategy implementation are facilitated by
functional policies in the following ways:
1. Through the functional policies, top management can ensure that strategy is implemented by
all parts of the organization as policies cover almost entire activities of the organization.
2. Policies specify the manner in which things can be done and limit discretion for managerial
action. Thus, the top management of the organization can rest assured that all personnel of the
organization will direct their efforts in a way relevant for strategy implementation.
3. Policies provide guidelines for managerial decisions. This aspect of the policies serves the
strategy implementation in two ways. First, there will be uniformity throughout the organization
in managerial action. Second, there will be considerable time savings in decision making as
managers are well aware what kind of actions. are required in a given situation.
4. Functional policies provide basis for control in respective areas as policies lead to consistent
pattern of behaviors: This, in turn, acts as basis for controlling.
5. Policies provide coordination across different functions. Coordination among different
functions is very important for strategy implementation.
All functions of an organization are interdependent and interrelated. Therefore, what is
happening in one function has its relevance for other- functions. All functions can contribute
positively when they are performed in a coordinated way.
6.5.2.3. Development of Functional Policies and Plans
Managers develop policies which are decision guides and make the strategy work. Therefore, the
critical element involved in analytical exercise for policy making is the ability to factor the grand
strategy into policies that are compatible, workable and just theoretically sound. It is not enough
for the managers to decide to change the strategy. What comes next is equally important: How do
we get there? When? and How efficiently? A manager answers these questions by preparing

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policies to implement the strategy. For example, if an organization chooses to go for
diversification, the policy maker has to decide what to diversify into, where to diversify, how
much money will be needed, from where the money will come and what changes are needed in
various functions of the organization. The decisions on all these aspects are much easier if proper
policies have been formulated.
The amount of policy making in the formal sense will vary with the size and complexity of the
organization. If the organization is small one with simple business, only a few policies will be
sufficient. Moreover, the policies are generally understood and verbal. However, in large and
complex organizations, large numbers of policies are needed. In whatever forms, the policies are
developed, they must be judged on the following criteria:
1. Do they exist in the areas critical to the success of the organization?
2. Do they reflect present or desired organizational practices and behavior?
3. Are they clear, definite, and explicit leaving no scope for misinterpretation?
4. Are they consistent with one another and do they reflect the timing needed to accomplish the
goals?
5. Are they practical in given existing or expected situations?
6.4.2.4. Integration of Functional Policies
When various functional policies have been developed for implementation of the strategy,
implementation is not necessarily complete; if these policies are not properly integrated, they
may not contribute properly towards strategy implementation. Integration in functional policies is
necessary because they are interdependent; a particular policy affects other policies and, in turn,
is affected by other policies. Functional policies may be considered like horses in a chariot. A
chariot may have very good horses but it may not move forward even by an inch if some of the
horses are pulling it forward and others are pulling it backward. The chariot may move forward
at a high speed if all horses pull it forward at the same time. The considerations that guide
strategists in the integration of functional policies may be as follows:
1. Need for internal consistency;
2. Relevance to developing organizational capabilities;
3. Making trade-off decisions;
4. Intensity of linkages; and
5. Timing of implementation of policies.

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Internal Consistency
There is a need to be sure that there is internal consistency in the policies developed for various
functions. Since various functions are interdependent, a decision for functionally dependent
factors cannot be made without regard to their impact on other areas of business. Otherwise, sub-
optimization is likely to result. For example, a major production decision variable is that of plant
capacity. This decision depends heavily on, besides other things long-range sales forecast and the
structure of distribution channel (marketing function), cost of capital and sources of funds
(finance function) and availability of relevant human resources (personnel function). Thus, plant
capacity decision cannot be made in isolation of other factors.
Relevance to Organizational Capabilities
Integration of various functional policies should focus on developer organizational capabilities to
implement the strategy effectively. For synergistic effects occur across functional areas and
distinctive competence emerges as a result of deploying resources to the areas where the
organization wishes to build up .its strategic advantages. This can be observed in the case of
companies which intend to be a market leader, low cost producer, or technologically superior
competitor, or the largest organization.

In all these alternative cases or a combination there of integration of various functional policies
would be necessary, though there may be difference in emphasis. For instance, the company
which wants to become a market leader would have to offer products of the best possible quality
at competitive prices through an efficient distribution system supported by aggressive
promotional efforts. . In general, integration of policies should aim at developing competencies
relevant to the company‘s objectives as defined through strategy formulation.
Making Trade-off Decisions
In integrating various functional policies, the organization faces the situation of trade-off
decisions because of the inherent nature of each organizational function. The demand for
optimizing a particular function may be in one way, for another function, in another way which
may be conflicting to each other. For example, production function‘s optimization may lie in the
most modern technology, a costly affair; finance function‘s optimization may be least cost
technology. Both are contradictory. Similar contradictions may be observed in other functional
areas also. Therefore, there has to be a trade-off among various functional areas which may sub

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optimize some functional areas but may optimize the organization. It is based on the maxim ‗if
you want to get something, you have‘ to lose something.‘ In applying this maxim in trade-off
decision, the principle is what you get is more important than what you lose. This is true in the
case of integration of policies.
Intensity of Linkages
All functions of an organization are interdependent and interlinked; some directly, others
indirectly. Types of linkage determine the level of integration of various functions. For instance,
if the strategy is built on offering newer products, there would be greater linkage between R&D
and production function; if the .strategy is built on low-cost mass consumption items, there
would be close linkage between production and marketing. Thus, intensity of linkages is not
constant but moves according to the strategy.
Timing of Implementation of Policies
There should be integration in timing in putting different policies into action. This may bring
better result for the organization as a whole. For instance, if a con1pany is facing resource
crunch, it may be better to put off those plans and actions which may have long-term effect on it
like R&D. Similarly, if the company is moving into high-tech area, more emphasis has to be
placed on training and development.

Functional approach of organizational analysis takes into account various functional areas and
evaluates these for identifying strengths and weaknesses. The major functional areas are
production/operations, marketing, finance and accounting, and human resources. Each of these
major areas is divided into sub areas, for example, marketing is divided into sales promotion,
physical distribution, sales volume,‘ and so on. Similar is the case with other functional areas.
Besides these functional areas, organization‘s general management factors are also taken into,
consideration. Thus, in functional approach of organizational analysis, following factors are
evaluated to identify strengths and weaknesses:
• Production/operations,
• Marketing,
• Finance,
• Human resources, and
• General management.

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In the discussion that follows, various features of these factors, indicating strengths and
weaknesses have been presented. While using these features in respect of various factors, two
points should be taken into consideration:
1. These features provide a normative and suggestive list; in actual practice, these factors may
vary depending on the nature of organizations.
2. Since organizational analysis is meant to relate strategy to environment, it is always future
oriented. Therefore, these factors should not be evaluated on static basis but on dynamic basis in
the context of environment. In fact, in many cases, the present strengths may turn to be
weaknesses because of environmental changes. Various factors have been presented, here, in a
sequence for the sake of convenience in analysis and not in order of their importance.
Production/Operations
Production / Operations processes are the mediating factors for converting raw materials into
finished products. There are various factors which affect the internal operations of the
organization and these factors should be taken into account while appraising the organization‘s
capabilities in these areas.
1. Allocation and Use of Resources
The degree of an organization‘s success or failure depends on the degree of effective allocation
and use of resources. Resources do not mean only money, building, and plant but also the scarce
resources of management talent, capability, and technical skills. An organization making well
balanced allocation and use of its resources is in a better position to face challenges from the
environment. The allocation and use of resources can be balanced by taking into account the
need for various activities contributing to the objectives, their criticality, and resource
requirements.
2. Rationalization of Resources.
Another important aspect of using resources is their rationalization. This problem is more
important in the context of multiunit organizations. For example, a multiunit organization may
have many plants and offices with duplication of various efforts. The extent to which the
duplication is avoided, the company becomes strong as cost of duplication is a burden on the
organization.
3. Locational Pattern

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Though locational pattern is affected by a large number of factors, both economic and non-
economic, it affects the operational efficiency of the organization. Such locational pattern can be
analyzed both for plants as well as for administrative offices. The extent to which organization‘s
plants and offices are located at favorable places, it stands to benefits and that is strength for it.
For example, opening of plants in backward areas may offer various advantages because of
incentives from the government, but opening of administrative offices may not offer the similar
advantages. This is the reason why many companies go for backward areas for establishing
production facilities but open offices in well-developed areas.
4. Production Capacity and its Use
The use of production capacity affects the profitability of the organization. High use of
production capacity is strength but a low use of this is a weakness because the organization‘s cost
of production in this case may be very high.
5. Cost Structure
The cost structure of the product affects the organization‘s profitability. If the cost of product is
high, it is a weakness. Moreover, the extent to which cost cannot be controlled is also weakness
of the organization. Thus, low cost with high level of controllability is strength and high cost
with low level of controllability is weakness.
6. Cost Volume Profit Relationship
While cost structure gives the general idea of high or low cost, cost volume profit relationship
suggests the profitability of the organization at various levels of production. If the relationship is
such that it gives break even at high level of production with low margin of safety, it is weakness
for the organization. On the other hand, if break even point is low with high margin of safety, it
is strength for the organization.
7. Operation Procedures
Efficient and effective operation procedures like production design, scheduling, output, and
quality control affect the internal efficiency of the organization. As such, these are the strengths
for the organization, and opposite of these will be weakness because these will affect
organizational efficiency adversely.
8. Raw Materials Availability

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The extent to which the raw materials are critical and scarce and are supplied from very limited
sources, the organizational functioning is adversely affected. In such a case, the organization
does not have any control or has very limited control over the
supply of raw materials. Hence, its dependence on the limited sources of supply of raw materials
is a weakness. If the company is procuring its materials from well-diversified sources and the
materials are easily available indigenously, its dependence is less which is strength for it.
9. Inventory Control System
An efficient inventory control system which pinpoints on the various aspects of materials
provides strength to the organization because it can control and regulate the procurement of
materials in such a way that its cost is minimum and there is no unnecessary hindrance in the
production. A defective and nonexistent inventory control system is a weakness.
10. Research and Development
Research and development is an important area where management should concentrate because
of two reasons. First technical collaboration with any foreign organization lasts up to five years
with an extension of three years in exceptional cases. The government stipulates that local
organizations should develop its R&D during this period. Second, there are special tax benefits
on the expenditure of R&D and products developed out of the organization‘s R&D efforts. In
order to take the advantages, the organization must take R&D activities and, must evaluate as
how these are contributing to the organizational product development. R&D activities can be
evaluated in terms of amount spent on them, number of products developed, or number of patents
registered by inside R&D. A high score on these items is strength of the organization.
11. Patent Rights
Organizations holding certain patent rights under which they can use some well established brand
names have certain advantages because they have not to incur any extra expenditure for
promoting the brand.

Marketing
Marketing factors are of prime importance for a business organization as it relates itself to its
environment through marketing functions. The managers should appraise the organization in the
light of various marketing factors taking into account how these factors are contributing or not
contributing to the achievement of organizational objectives and how long they will continue to

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do so if the same position continues. Prominent marketing factors taken for evaluation are as
follows.
1. Competitive Competence
Business organizations have to operate in a competitive field, except in the case of protective
markets where markets are not defined by individual company or market factors but by non-
market factors. The organization‘s competitive competence can be appraised on the basis of
trends in market shares for which the information can be made available from various outside
sources as well as through the organization‘s own marketing research department. Apart from
market shares, many other factors also go in determining the competitive competence.
2. Product Mix
Product mix decides the various sources of revenue to the organization. This is true not only for a
diversified organization but even for a single class. If the revenue is coming from a single
product or from very limited number of products for a diversified company, this may be its
weakness.

3. Product Life Cycle

Product life cycle is an attempt to recognize distinct stages in the sales history of the product.
Corresponding to these stages are the various marketing opportunities and threats. Normally
every product and brand has to pass through a life cycle: introduction stage, growth stage,
maturity stage, and declining stage. Products at declining stage are the weak point for the
organization and adequate precaution must be taken.
4. Marketing Research
Marketing research offers the information for taking various marketing decisions in the light of
the environmental demand. The efficient and effective marketing research system is strength for
the organization because it will enable to relate the organization with its environment through
suitable strategy.
5. Channel of Distribution.
An effective channel of distribution is strength of the organization because it not only distributes
the products at the points where these are needed but also provides the feedback regarding the
changes in the market forces. However, a centralized distribution channel may be a weak point
because it may weaken the organization‘s position at the time of emergency.

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6. Sales Force
An effective and efficient sales force closed with key customers is strength for the organization
because it may withstand any threat posed by the environment. However, sales force
concentrating sales efforts to a few customers may be weakness.
7. Pricing
Pricing is a factor which affects both sales as well as revenue to the organization, particularly in
price sensitive markets. Though there can be different pricing strategies in different markets and
at different product life stages, these must match with the product and market.
8. Promotional Efforts
Various promotional efforts affect the positioning of the products in the market. They also affect
the brand images as well as the general image of the organization. Effective promotional efforts
are strength for the organization and their absence a weakness.
Finance
Finance area deals primarily with raising, administering, and distributing financial resources to
various activities so that a proper balance is maintained and the organization achieves its
objectives. Since the objective achievement is often expressed in monetary terms, the areas of
finance and accounting have assumed added importance. The extent to which the organization
has effective financial management and accounting system, it is strong. The strengths and
weaknesses in the areas of finance and accounting can be ascertained in the following ways.
1. Capital Cost
The various sources through which the organization raises its financial funds determine the
capital cost. A proper balancing of various sources of financing ensures that the overall cost of
capital for the organization is low. While determining the sources for funds, various factors can
be taken into account, such as debt/equity norm, capital market position, profitability of
organization, and various conditions attached with funds. A low capital cost is strength and high
capital cost is weakness.
2. Capital Structure
Capital structure of an organization determines the scope for flexibility in raising additional
capital needed, maintaining financial leverage, and maintaining minimum capital cost. An
effective capital structure is strength which provides for greater flexibility for raising funds and
appropriating various sources of funds so as to take advantages of trading on equity.

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3. Financial Planning
Financial planning is the determination, in advance, of the quantum of capital requirement and its
forms. Thus, it determines what types of assets will be required to run the business and how
much capital will be required for this, time when the capital is required, and from where the
necessary capital will be available. If the organization plans all these things well in advance, it
stands to benefit and thus, it is its strength.
4. Tax Benefits
Tax benefits are partly the result of efficient financial planning and partly the result of
environmental variables, particularly government policy. If the organization is planning its
investment pattern properly, it takes the advantages of tax benefits under the existing provisions
that reduce the tax liability of the organization to a very low level or even zero level,
consequently improving its liquidity. Similar advantages may accrue in indirect taxes also.
5. Pattern of Shareholding
The pattern of shareholding decides the type of threats the organization may fare regarding its
take over by another company or group. If the shareholding is widely distributed, the company
and its present management can run things smoothly and can think in long-term perspective.
Thus, wider shareholding provides strength to the organization but concentration of shareholding
even in the hands of financial institutions may be a weakness.
Strengths and weaknesses In marketing
6. Relationship with Shareholders and Financiers
The type of relationship between the company and its shareholders and financiers determines the
type of risk that the company can take. If such relationship is cordial, the company can go for
smooth working even in case of adversity and can undertake major policy changes. The role of
shareholders and financiers is quite important in formulating and implementing these policies
because such actions can be taken only after their approval.
7. Accounting Procedures
Efficient accounting procedures and systems for costing, budgeting, profit planning, and auditing
not only determine that there is no. misappropriation of funds but also provide feedback for
further course of action. They provide information at the points where it is needed and the time
when it is needed. Absence of such systems provides inefficiency in the organization and it
cannot know the way in which it is progressing.

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Human Resources
In organizational analysis, often, human resources are not given adequate importance because of
the perception that these resources do not contribute to organizational success. This perception
was valid in pre-liberalized era, when most of the organizations were operating in protected
markets. However, post- liberalization, the competitive scenario has changed from sellers‘
market to buyers‘ market in which organizations are using human .resources as a means for
developing competitive advantage. The scarce resource and the primary source of competitive
advantage, is no longer physical or financial capital, but human capital. The importance of
analyzing human resources is as follows:
1. Human resources handle all physical and financial resources in an organization. Without their
efforts, these non-human resources remain idle. All the activities of any enterprise are initiated
and determined by the persons who make up that institution: plants, offices, computers,
automated equipments, and all else that a modern firm uses are unproductive except the human
efforts.
2. Human resources are the source of creative energy. In today‘s dynamic world, creativity is
vital to every organization. Creative thinking is the process of bringing a problem before one‘s
mind clearly by imagining, visualizing, supposing, musing, contemplating, or the like, and then
originating an idea, concept, realization, or picture along new or unconventional lines. People in
the organization are the only source of such creativity. They can produce unlimited ideas. There
is no apparent limit to what people can accomplish when they are motivated to use their potential
to create new and better ideas. No other resource in the organization can do that.

Human resources can be used as a means for developing competitive advantage which may be in
the form of lower cost of production, development of products for special needs, unique means
for marketing the products, developing means for raising funds at lower cost, etc. Since all these
are done by human resources, they can be geared to achieve all these. In analyzing human
resources, following factors are taken into consideration:
1. Quality of Personnel
Quality of personnel employed by an organization is a key determinant of its success. The quality
of personnel includes their knowledge, skills, attitudes, and motivation to work. If all these

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characteristics are favorable, these are strengths as these can be used as a means for translating
physical and financial resources into outputs in a better way.
2. Personnel Turnover and Absenteeism
Personnel turnover, particularly at managerial and technical levels, is a big problem for
organizations in today‘s context. In knowledge based industries like information technology,
consultancy, etc., this problem is even more acute. Since organizations build their strategies
around the personnel available at present or available in future, retention of personnel is a
significant issue. To the extent, an organization is able to retain its key personnel, it has strength.
Coupled with personnel turnover is personnel absenteeism. Those organizations which are able to
manage personnel turnover and absenteeism have strengths.
3. Industrial Relations
Industrial relations is a basic element for the success of the organization particularly in the age of
frequent industrial relations problems. Better industrial relations is strength for the organization.
The state of industrial relations can be measured taking into account the breakdown in work
because of employee agitation or non-cooperation, number of industrial disputes, number of
grievances from the employees, employee absenteeism and turnover, and their willingness to
accept change in the organization.
General Management
Various factors discussed above are, no doubt, important but they cannot work well without the
support of suitable leadership and various management practices. These are the integrating force
of an organization. Therefore, strategists should analyze these factors to identify strengths and
weaknesses. Following factors are relevant in this category:
1. Leadership
Leadership is the process of winning enthusiastic support of personnel in an organization. It is
one of the major determinants of organizational success. Most of the organizations which have
achieved high success are characterized by good leadership, and they place emphasis on
transformational leadership as against transactional leadership. A transformational leader inspires
his followers through high vision and energy. A transactional leader determines what
subordinates need to do to achieve objectives, classifies those requirements, and helps the
subordinates become confident that they can reach objectives.
2. Top Management Constitution and Philosophy

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Top management contributes the lifeblood for the total organization. Its constitution and
philosophy are strong determinants of organizational success. Organization characterized by age
old and traditional management is less likely to succeed in the environment of growing
competition. Enterprising approach of top management is also an important factor determining
the growth of the organization. Thus, future oriented top management having enterprising
professional approach Is strength of the organization.
3. Organizational Image and Prestige
Organizational image and prestige affect the organizational working by providing it various
facilities and constraints better image and prestige providing facilities and low image and
prestige providing constraints. The measurement of corporate image and prestige, however, is
quite difficult because of the absence of any quantitative criteria. For this purpose, various
indicators can be taken into account, such as appraisal of organizational working by third parties,
willingness of financial institutions to advance loans, customers‘ loyalty towards the products
offered by the company, level of satisfaction to suppliers and creditors of the company,
importance attached to the statements by the company, etc. A favorable reaction on these factors
is an indicator of better company image and prestige which is strength for the company.
4. Organizational Climate
Organizational climate is the internal set of attributes specific to an organization that may be
induced from the way the organization deals with its members. Thus, organization members‘
relationship is built upon the basis of how the former treats the latter. Organizational climate can
be measured by taking into account how its members react to various actions, how willingly they
cooperate with it in achieving Its objectives, and how satisfied they are with the organization. A
sound organizational climate based on mutual trust and confidence and human consideration is
strength for the organization.

5. Management Practices
The extent to which the organization follows various management practices affects its success.
High scores on managerial practices in respect to strategic planning, objective control and
evaluation system, management information system, and manpower planning and succession
plan are strengths of the organization.
6. Organization Structure

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Organization structure is network of internal relationship through which individuals interact
among themselves in the context of organizational matters. A suitable organization structure is
strength for the organization. The suitability of organization structure is not universal
phenomenon but is determined by the organization‘s environment, technology, size, and people.
Thus, a suitable organization structure is one, which meets the demands of all these factors.
7. Organizational External Relationships
As discussed earlier, the organization has to work in environment where large number of factors
exists. These factors affect the organizational operations by offering facilities and constraints to
it. The extent to which the organization builds relationships with the factors offering such
facilities and constraints, including government and other regulatory bodies, its success or failure
is determined. If its relationship with the various external forces is good, it stands to affect these
forces favorably making use of most facilities and avoiding constraints, hence strength for the
organization.
For successful functional implementation strategists have to integrate the business and the
functional strategies. The following table illustrates how business and functional strategies can
be integrated.
Table 6.1. Integrating Business and Functional Strategies
Strategy Low cost Differentiation Low cost differentiation
Marketing Emphasize low cost Emphasize differentiated Emphasize differentiated
distribution and low distribution & advertising distribution & advertising
cost advertising and & promotion scale. & promotion on a large
promotion scale at the lowest cost
possible
Finance Lower financial costs Emphasize quality in Emphasize quality in
by borrowing when operations even when the operations when the cost
credit costs are low cost of doing so is high of doing so is relatively
and issuing stock. low.
When the market is
strong.
Production Emphasize operation Emphasize high quality Purchase high quality
efficiencies through inputs even if they cost inputs but only if costs are

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 learning, economies of more. Conduct storage low. Conduct storage
scale, capital labor warehouse & inventory warehouse & inventory
substitution activities with extensive activities with care but
possibilities care, even if costs are only if costs are relatively
higher. low.
Research & Emphasize process Emphasize product / service Emphasize both product /
Development R&D aimed at R&D aimed at enhancing service R&D as well as
lowering costs of the outputs of the business process R&D
operation &
distribution
Human Emphasize reward Emphasize reward systems Emphasize reward
resource systems that that encourage innovation systems that encourage
management encourage cost cost reduction &
reductions innovation
Information Emphasize timely & Emphasize both timely & Emphasize timely &
system pertinent information pertinent information on pertinent information on
on costs of operations costs of operations & the on going processes
innovations processes that that yield unique products
are meant to yield unique / service.
products

6.5.3. Behavioral Implementation

Implementation of strategy requires the application of behavioral sciences knowledge. Among
others it demands strategic leadership, development of appropriate organizational culture (good
culture) and ensuring corporate governance
6.5.3.1 Strategic Leadership
Strategic leadership is the process of transforming an organization with the help of its people so -
as to put it in a unique position. Thus, two aspects are involved in strategic leadership. First, it
transforms the organization which involves changing all faces such as size, management
practices, culture and values, and people in such a way that the, .organization becomes unique.
Second, strategic leadership process emphasizes people because they are the source for

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transforming various physical and financial resources of the organization into outputs that are
meaningful to the society. Thus, strategic leadership proceeds as follows:-
1. Strategic leadership deals with vision-keeping the mission in sight-and with effectiveness and
results. It is less oriented to organizational efficiency in-terms of cost-benefit analysis.
2. Strategic leadership en1phasises transformational aspect and, therefore transformational
leaders emerge in the organization. Transformational leadership is the set of abilities that allow a
leader to recognize the need for change, to ‗create a vision to guide that change. and to execute
that change effectively.
3. Strategic leadership inspires and motivates people to work together with a common vision and
purpose.
4. Strategic leadership has external focus rather internal focus. This external focus helps the
organization to relate itself with its environment

6.5.3.2. Organizational Culture

Organizational culture is another element which affects strategy implementation as it provides a
framework within, which the behavior of the members takes place. Though there are differing
views on what constitute an organizational culture, generally, it is defined as a set of assumptions
the members of an organization share in common. For example, organizational culture has been
defined as follows:
―Organizational culture is the set of assumptions, beliefs, values and norms that are shared by an
organization‘s members. Thus, there are two types of elements which define the culture of an
organization: abstract elements and material elements. Abstract - elements are internally oriented
and include values, beliefs, attitudes, and feelings. Material elements are externally focused and
include building, personnel dresses, products, etc. Some common things to demonstrate the
components of organizational culture included:
· Shared things (e.g. the way people dress)
· Shared saying (e.g.., let‘s go down to work)
· Shared actions (e.g., a service-oriented approach)
· Shared feelings (e.g., hard work is not rewarded here)

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6.5.3.2.1. Impact of Organizational Culture
Organizational culture is very important factor which affects the different organizational
processes including implementation of strategy; strategy implementation involves completion of
different processes. In particular, corporate culture affects the following aspects of the
organization.

1. Objective Setting
Culture molds people and people are the basic building blocks of the organization. The objectives
of the organization must reflect, at least in part, the objectives of its members, particularly those
who are the key decision makers. Thus, for one organization the objective may be profit
maximization but the same objective may be unworthy; mean, and petty for other organizations.
2. Work Ethics
Ethics relates to conformity to the principles of human conduct. According to common usage,
moral, good, right, honest, etc. is more or less used as synonymous to ethical act. Work ethics in
an organization is derived from its ‗culture. Thus, corporate culture determines the ethical
standards for the organization as a whole and its individual members.
3. Motivational Pattern
Culture interacts ‗to develop in each person‘ a motivational pattern. Culture determines the way
people approach their jobs and even life in general. If organizational culture is geared towards
achievement, people will find it quite motivating and put their utmost energies for the work. In
its absence high achievement-oriented people develop frustration and desert the organization
Therefore; for implementing strategies particularly growth strategies, organizational culture
should be achievement oriented.
4. Organizational Processes
Various organizational - processes like planning, decision making, controlling, etc. are
determined by the organizational culture because these processes are carried out by the people, in
tl1e organization.
6.5 .3.2.2. Relating Culture and Strategy
We have seen that strategy and culture are interlinked; culture affects how-a strategy may be
implemented though it has a role in strategy formulation too. Our emphasis here is to analyze

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how organizational culture can be made a facilitating factor in ‗strategy implementation. In
relating strategy and culture strategists have four alternatives:
1. To ignore corporate culture;
2. To adapt‘ strategy implementation to suit corporate culture;
3. To change corporate culture to suit strategic requirements; and
4. To change the‘ strategy to ‗fit the corporate culture.
Each of these alterative has different implications for the total strategic management. Now let us
see how a particular alternative is relevant. Strategists can simply ignore the corporate culture
while implementing a strategy especially when it is not possible to change corporate culture. In
fact corporate culture is built over a period of time and. therefore can not be changed overnight;
cultural change is a slow process and is time-consuming. Ignoring culture in strategic
management is not better alterative because it may be dysfunctional.

Another alternative to the above is to change strategy implementation to suit corporate culture.
Strategists may have flexibility in organizational design.-organizational systems and processes
for strategy implementation. These variables can be manipulated to sub serve the interests of
‗corporate culture. However, in such a case, each specific situation in the organization calls for
an innovative solution.

The third alternative is to change the strategy itself if it does not fit with the corporate culture.
However changing strategy mid-way is- not a very desirable proposition. Therefore corporate
culture should -be considered as a determinant of strategic choice.

The last alternative in relating strategy is to change corporate culture to suit strategic
requirements. This is the optimum choice in the present days, business environment which is
becoming more and more competitive day-by-day necessitating change in old methods. In fact
many companies have failed simply because they were not able to adopt suitable strategies due to
corporate cultural constraints. Though cultural change process is slow attempt can be made to
change the culture. This transition may be brought by making strategic task explicit, enhancing
managerial capability to imbibe changes, arid exhibiting a strong and assertive leadership.

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Values of individuals, particularly those of key strategists, have major impact on strategy of the,
organization. While terminal values shape organizational strategies, instrumental values indicate
how these strategies are to be implemented. Depending on the dominance of terminal values in
strategists, these are means for organizational transformation. Let us see how this happens.

Strategy implementation is mostly affected by instrumental values of people in the organization.

However, when we say people, the question arises: who- are- these -people in the organization?
The answer -of -this question is significant - because that will determine the shape of strategy
implementation. From strategic management point of view, people of an organization can be
divided into four groups; board of directors, chief executives, other managers, and corporate
plam1ing staff. Out of these groups, chief executive and managers under board of directors are
mostly responsible for strategy implementation. However, values are held by individuals which
are part of their personality. Therefore, it is quite likely that values of, different individuals do
not match. Though organizational culture represents the collectivity of personal values, ‗it is only
representative and not all inclusive. Thus, in actual practice, the relationship between
organizational values and personal values could be different (different weak values - common
values -different strong values).
Common-Values
Since an organization is a collectivity of people and organizational values represent the collective
values of its members. There are some commonalities between these two. These common values
do not require any reconciliation or modification because both have already been integrated.

Different weak Values

In this case, part of the organizational and personal values differs but the divergence is related to
weak values either terminal or instrumental. A weak value has low priority in the hierarchy of
values whether organizational or personal. In fact, every individual has a set of values arranged
in hierarchy. Because of hierarchical nature of values they differ in terms of importance. Since
there are individual differences, hierarchy of values also differs. For example, an individual may
attach very high importance to honesty and integrity and does not reconcile on these issues.
Another individual may place it at low level and may reconcile on these issues. Therefore, weak
and strong values are relative and person-oriented. Where divergence exists on weak values

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reconciliation takes place through normal socialization process which involves adaptation of
organizational values and norms by employees with a view, to adhere to those. This
socialization- process, however, is pot one-way traffic rather two-way traffic in which an
individual is able to modify organizational values to-some extent.
Different Strong values
Problems in strategy implementation emerge when there is divergence of values which are strong
for the organization or individual. If values are strong to the organization any divergence may
lead to separation of individuals whose values are at divergence. For example, let an organization
has very strong values in terms of ethical integrity. Any individual falling short of integrity is
sacked regardless of his position. Another alternative available to the organization is to design its
structure and processes in such a way that these match with the values of an ‗individual whose
values are at divergence. In such a situation the organization will retain its core values while
allowing change in others. This type of adjustment is required when the individuals are quite
critical to the success of the strategy under implementation.
6.5.3.3. Corporate Governance
Corporate governance is a newly introduced ‗system for managing a company in the best interest
of all its stakeholders - though in the ‗context of state administration, the concept of governance
is quite old where it is referred to as the system of directing and controlling the activities of a
state particularly in princely states and empires.
A corporate governance code usually contains the following matters:
1. Constitution of Board of Directors. Constitution of board of directors role of non-executive
directors, its meeting, key matters that must be brought before the board, etc.
2. Disclosure of Information. Disclosure of financial and other information in the company‘s
annual accounts and reports as well as periodical disclosure
2. Management Practices. Management practices to protect the interests of shareholders,
consumers, financiers, creditors, distributors, government and society

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 CHAPTER SEVEN:

STRATEGY REVIEW, EVALUATION AND CONTROL

7.1. The Nature of Strategy Evaluation

The strategic-management process results in decisions that can have significant, long lasting
consequences. Erroneous strategic decisions can inflict severe penalties and can be exceedingly
difficult, if not impossible, to reverse. Most strategists agree, therefore, that strategy evaluation is
vital to an organization‘s well-being; timely evaluations can alert management to problems or
potential problems before a situation becomes critical. Strategy evaluation includes three basic
activities: (1) examining the underlying bases of a firm‘s strategy, (2) comparing expected results
with actual results, and (3) taking corrective actions to ensure that performance conforms to
plans. The strategy-evaluation stage of the strategic-management process is illustrated in Figure
9-1. Adequate and timely feedback is the cornerstone of effective strategy evaluation. Strategy
evaluation can be no better than the information on which it is based. Too much pressure from
top managers may result in lower managers contriving numbers they think will be satisfactory.
Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on
evaluating strategies may be expensive and counterproductive. No one likes to be evaluated too
closely! The more managers attempt to evaluate the behavior of others, the less control they
have. Yet too little or no evaluation can create even worse problems. Strategy evaluation is
essential to ensure that stated objectives are being achieved. In many organizations, strategy
evaluation is simply an appraisal of how well an organization has performed. Have the firm‘s
assets increased? Has there been an increase in profitability? Have sales increased? Have
productivity levels increased? Have profit margin, return on investment, and earnings-per-share
ratios increased? Some firms argue that their strategy must have been correct if the answers to
these types of questions are affirmative. Well, the strategy or strategies may have been correct,
but this type of reasoning can be misleading because strategy evaluation must have both a long-
run and short-run focus. Strategies often do not affect short-term operating results until it is too
late to make needed changes.

It is impossible to demonstrate conclusively that a particular strategy is optimal or even to

guarantee that it will work. One can, however, evaluate it for critical flaws. Richard Rumelt

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offered four criteria that could be used to evaluate a strategy: consistency, consonance,
feasibility, and advantage. Described in Table 9-1, consonance and advantage are mostly based
on a firm‘s external assessment, whereas consistency and feasibility are largely based on an
internal assessment. Strategy evaluation is important because organizations face dynamic
environments in which key external and internal factors often change quickly and dramatically.
Success today is no guarantee of success tomorrow! An organization should never be lulled into
complacency with success. Countless firms have thrived one year only to struggle for survival
the following year. Organizational trouble can come swiftly, as further evidenced by the
examples described in Table 9-2.

Rumelt’s Criteria for Evaluating Strategies

Consistency

A strategy should not present inconsistent goals and policies. Organizational conflict and
interdepartmental bickering are often symptoms of managerial disorder, but these problems may
also be a sign of strategic inconsistency. Three guidelines help determine if organizational
problems are due to inconsistencies in strategy:

• If managerial problems continue despite changes in personnel and if they tend to be issue-based
rather than people-based, then strategies may be inconsistent.

• If success for one organizational department means, or is interpreted to mean, failure for
another department, then strategies may be inconsistent.

• If policy problems and issues continue to be brought to the top for resolution, then strategies
may be inconsistent.

Consonance

Consonance refers to the need for strategists to examine sets of trends, as well as individual
trends, in evaluating strategies. A strategy must represent an adaptive response to the external
environment and to the critical changes occurring within it. One difficulty in matching a firm‘s
key internal and external factors in the formulation of strategy is that most trends are the result of
interactions among other trends. For example, the day-care explosion came about as a combined

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result of many trends that included a rise in the average level of education, increased inflation,
and an increase in women in the workforce. Although single economic or demographic trends
might appear steady for many years, there are waves of change going on at the interaction level.

Feasibility

A strategy must neither overtax available resources nor create unsolvable sub problems. The
final broad test of strategy is its feasibility; that is, can the strategy be attempted within the
physical, human, and financial resources of the enterprise? The financial resources of a business
are the easiest to quantify and are normally the first limitation against which strategy is
evaluated. It is sometimes forgotten, however, that innovative approaches to financing are often
possible. Devices, such as captive subsidiaries, sale-leaseback arrangements, and tying plant
mortgages to long-term contracts, have all been used effectively to help win key positions in
suddenly expanding industries. A less quantifiable, but actually more rigid, limitation on
strategic choice is that imposed by individual and organizational capabilities. In evaluating a
strategy, it is important to examine whether an organization has demonstrated in the past that it
possesses the abilities, competencies, skills, and talents needed to carry out a given strategy.

Advantage

A strategy must provide for the creation and/or maintenance of a competitive advantage in a
selected area of activity. Competitive advantages normally are the result of superiority in one of
three areas: (1) resources, (2) skills, or (3) position. The idea that the positioning of one‘s
resources can enhance their combined effectiveness is familiar to military theorists, chess
players, and diplomats. Position can also play a crucial role in an organization‘s strategy. Once
gained, a good position is defensible—meaning that it is so costly to capture that rivals are
deterred from full-scale attacks. Positional advantage tends to be self-sustaining as long as the
key internal and environmental factors that underlie it remain stable. This is why entrenched
firms can be almost impossible to unseat, even if their raw skill levels are only average.
Although not all positional advantages are associated with size, it is true that larger organizations
tend to operate in markets and use procedures that turn their size into advantage, while smaller
firms seek product/market positions that exploit other types of advantage. The principal
characteristic of good position is that it permits the firm to obtain advantage from policies that

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would not similarly benefit rivals without the same position. Therefore, in evaluating strategy,
organizations should examine the nature of positional advantages associated with a given
strategy.

Strategy evaluation is becoming increasingly difficult with the passage of time, for many
reasons. Domestic and world economies were more stable in years past, product life cycles were
longer, product development cycles were longer, technological advancement was slower, change
occurred less frequently, there were fewer competitors, foreign companies were weak, and there
were more regulated industries. Other reasons why strategy evaluation is more difficult today
include the following trends:

1. A dramatic increase in the environment‘s complexity

2. The increasing difficulty of predicting the future with accuracy

3. The increasing number of variables

4. The rapid rate of obsolescence of even the best plans

5. The increase in the number of both domestic and world events affecting organizations

6. The decreasing time span for which planning can be done with any degree of Certainty.

A fundamental problem facing managers today is how to control employees effectively in light
of modern organizational demands for greater flexibility, innovation, creativity, and initiative
from employees.2 How can managers today ensure that empowered employees acting in an
entrepreneurial manner do not put the well-being of the business at risk? Recall that Kidder,
Peabody & Company lost $350 million when one of its traders allegedly booked fictitious
profits; Sears, Roebuck and Company took a $60 million charge against earnings after admitting
that its automobile service businesses were performing unnecessary repairs. The costs to
companies such as these in terms of damaged reputations, fines, missed opportunities, and
diversion of management‘s attention are enormous.

When empowered employees are held accountable for and pressured to achieve specific goals
and are given wide latitude in their actions to achieve them, there can be dysfunctional behavior.
For example, Nordstrom, the upscale fashion retailer known for outstanding customer service,

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was subjected to lawsuits and fines when employees underreported hours worked in order to
increase their sales per hour—the company‘s primary performance criterion. Nordstrom‘s
customer service and earnings were enhanced until the misconduct was reported, at which time
severe penalties were levied against the firm.

7.2. A Strategy-Evaluation Framework

Table 9-3 summarizes strategy-evaluation activities in terms of key questions that should be
addressed, alternative answers to those questions, and appropriate actions for an organization to
take. Notice that corrective actions are almost always needed except when (1) external and
internal factors have not significantly changed and (2) the firm is progressing satisfactorily
toward achieving stated objectives. Relationships among strategy-evaluation activities are
illustrated in Figure 9-2.

Reviewing Bases of Strategy

As shown in Figure 9-2, reviewing the underlying bases of an organization‘s strategy could be
approached by developing a revised EFE Matrix and IFE Matrix. A revised IFE Matrix should
focus on changes in the organization‘s management, marketing, finance/accounting,
production/operations, R&D, and management information systems strengths and weaknesses. A
revised EFE Matrix should indicate how effective a firm‘s strategies have been in response to
key opportunities and threats. This analysis could also address such questions as the following:

1. How have competitors reacted to our strategies?

2. How have competitors‘ strategies changed?

3. Have major competitors‘ strengths and weaknesses changed?

4. Why are competitors making certain strategic changes?

5. Why are some competitors‘ strategies more successful than others?

6. How satisfied are our competitors with their present market positions and profitability?

7. How far can our major competitors be pushed before retaliating?

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8. How could we more effectively cooperate with our competitors?

Table 7.1: A Strategy-Evaluation Assessment Matrix

Have Major Changes Have Major Changes Has the Firm Progressed
Occurred in the Firm Occurred in the Firm Satisfactorily Toward
Internal Strategic External Strategic Achieving Its Stated
Position? Position? Objectives? Result
No No No Take corrective actions
Yes Yes Yes Take corrective actions
Yes Yes No Take corrective actions
Yes No Yes Take corrective actions
Yes No No Take corrective actions
No No Yes Take corrective actions
No No No Take corrective actions
No Yes Yes Continue present strategic course
Numerous external and internal factors can prevent firms from achieving long-term and annual
objectives. Externally, actions by competitors, changes in demand, changes in technology,
economic changes, demographic shifts, and governmental actions may prevent objectives from
being accomplished. Internally, ineffective strategies may have been chosen or implementation
activities may have been poor. Objectives may have been too optimistic. Thus, failure to achieve
objectives may not be the result of unsatisfactory work by managers and employees. All
organizational members need to know this to encourage their support for strategy-evaluation
activities. Organizations desperately need to know as soon as possible when their strategies are
not effective. Sometimes managers and employees on the front lines discover this well before
strategists. External opportunities and threats and internal strengths and weaknesses that
represent the bases of current strategies should continually be monitored for change. It is not
really a question of whether these factors will change but rather when they will change and in
what ways. Here are some key questions to address in evaluating strategies:

1. Are our internal strengths still strengths?

2. Have we added other internal strengths? If so, what are they?
3. Are our internal weaknesses still weaknesses?

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 4. Do we now have other internal weaknesses? If so, what are they?
5. Are our external opportunities still opportunities?
6. Are there now other external opportunities? If so, what are they?
7. Are our external threats still threats?
8. Are there now other external threats? If so, what are they?
9. Are we vulnerable to a hostile takeover?

Figure 7.1 : A Strategy-Evaluation Framework

ACTIVITY ONE: REVIEW UNDERLYING BASES OF STRATEGY

Prepare revised Internal Prepare revised External

Factor Evaluation (IFE) Matrix Factor Evaluation (EFE) Matrix

Do significant
differences occur? Yes

Yes

ACTIVITY TWO: MEASURE ORGANIZATIONAL PERFORMANCE

Compare planned to actual progress toward meeting stated objectives

Do significant Differences
occur? Yes

Yes ACTIVITY THREE:

TAKE CORRECTIVE
Continue present course
7.3. Published Sources of Strategy-Evaluation ACTIONS

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Information

A number of publications are helpful in evaluating a firm‘s strategies. For example, Fortune
annually identifies and evaluates the Fortune 1,000 (the largest manufacturers) and the Fortune
50 (the largest retailers, transportation companies, utilities, banks, insurance companies, and
diversified financial corporations in the United States). Fortune ranks the best and worst
performers on various factors, such as return on investment, sales volume, and profitability. In its
March issue each year, Fortune publishes

its strategy-evaluation research in an article entitled ―America‘s Most Admired Companies.‖

Eight key attributes serve as evaluative criteria: people management; innovativeness; quality of
products or services; financial soundness; social responsibility; use of corporate assets; long-term
investment; and quality of management. In October of each year, Fortune publishes additional
strategy-evaluation research in an article entitled ―The World‘s Most Admired Companies.‖
Fortune’s 2009 evaluation in Table 9-7 reveals the firms most admired (best managed) in their
industry. The most admired company in the world in 2009 was Nike, followed by Anheuser-
Busch, Nestle, and Procter & Gamble.9 Another excellent evaluation of corporations in America,
―The Annual Report on American Industry,‖ is published annually in the January issue of
Forbes. It provides a detailed and comprehensive evaluation of hundreds of U.S. companies in
many different industries. BusinessWeek, Industry Week, and Dun’s Business Month also
periodically publish detailed evaluations of U.S. businesses and industries. Although published
sources of strategy-evaluation information focus primarily on large, publicly held businesses, the
comparative ratios and related information are widely used to evaluate small businesses and
privately owned firms as well.

7.4. Characteristics of An effective evaluation system

Strategy evaluation must meet several basic requirements to be effective. First, strategy
evaluation activities must be economical; too much information can be just as bad as too little
information; and too many controls can do more harm than good. Strategy-evaluation activities
also should be meaningful; they should specifically relate to a firm‘s objectives. They should
provide managers with useful information about tasks over which they have control and
influence. Strategy-evaluation activities should provide timely information; on occasion and in

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some areas, managers may daily need information. For example, when a firm has diversified by
acquiring another firm, evaluative information may be needed frequently. However, in an R&D
department, daily or even weekly evaluative information could be dysfunctional. Approximate
information that is timely is generally more desirable as a basis for strategy evaluation than
accurate information that does not depict the present. Frequent measurement and rapid reporting
may frustrate control rather than give better control. The time dimension of control must
coincide with the time span of the event being measured.

Strategy evaluation should be designed to provide a true picture of what is happening. For
example, in a severe economic downturn, productivity and profitability ratios may drop
alarmingly, although employees and managers are actually working harder. Strategy evaluations
should fairly portray this type of situation. Information derived from the strategy-evaluation
process should facilitate action and should be directed to those individuals in the organization
who need to take action based on it. Managers commonly ignore evaluative reports that are
provided only for informational purposes; not all managers need to receive all reports. Controls
need to be action-oriented rather than information-oriented.

The strategy-evaluation process should not dominate decisions; it should foster mutual
understanding, trust, and common sense. No department should fail to cooperate with another in
evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too
restrictive. Complex strategy-evaluation systems often confuse people and accomplish little. The
test of an effective evaluation system is its usefulness, not its complexity. Large organizations
require a more elaborate and detailed strategy-evaluation system because it is more difficult to
coordinate efforts among different divisions and functional areas. Managers in small companies
often communicate daily with each other and their employees and do not need extensive
evaluative reporting systems. Familiarity with local environments usually makes gathering and
evaluating information much easier for small organizations than for large businesses. But the key
to an effective strategy-evaluation system may be the ability to convince participants that failure
to accomplish certain objectives within a prescribed time is not necessarily a reflection of their
performance. There is no one ideal strategy-evaluation system. The unique characteristics of an
organization, including its size, management style, purpose, problems, and strengths, can

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determine a strategy-evaluation and control system‘s final design. Robert Waterman offered the
following observation about successful organizations‘ strategy-evaluation and control systems:

Successful companies treat facts as friends and controls as liberating. Morgan Guaranty and
Wells Fargo not only survive but thrive in the troubled waters of bank deregulation, because their
strategy evaluation and control systems are sound, their risk is contained, and they know
themselves and the competitive situation so well. Successful companies have a voracious hunger
for facts. They see information where others see only data. They love comparisons, rankings,
anything that removes decision making from the realm of mere opinion. Successful companies
maintain tight, accurate financial controls. Their people don‘t regard controls as an imposition of
autocracy but as the benign checks and balances that allow them to be creative and free.

7.5. The Contingency Model

A basic premise of good strategic management is that firms plan ways to deal with unfavorable
and favorable events before they occur. Too many organizations prepare contingency plans just
for unfavorable events; this is a mistake, because both minimizing threats and capitalizing on
opportunities can improve a firm‘s competitive position. Regardless of how carefully strategies
are formulated, implemented, and evaluated, unforeseen events, such as strikes, boycotts, natural
disasters, arrival of foreign competitors, and government actions, can make a strategy obsolete.
To minimize the impact of potential threats, organizations should develop contingency plans as
part of their strategy-evaluation process. Contingency plans can be defined as alternative plans
that can be put into effect if certain key events do not occur as expected. Only high-priority areas
require the insurance of contingency plans. Strategists cannot and should not try to cover all
bases by planning for all possible contingencies. But in any case, contingency plans should be as
simple as possible. Some contingency plans commonly established by firms include the
following:

1. If a major competitor withdraws from particular markets as intelligence reports indicate, what
actions should our firm take?

2. If our sales objectives are not reached, what actions should our firm take to avoid profit
losses?

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3. If demand for our new product exceeds plans, what actions should our firm take to meet the
higher demand?

4. If certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt;

loss of patent protection; or destruction of manufacturing facilities because of earthquakes,
tornadoes or hurricanes—what actions should our firm take?

5. If a new technological advancement makes our new product obsolete sooner than expected,
what actions should our firm take?

Too many organizations discard alternative strategies not selected for implementation although
the work devoted to analyzing these options would render valuable information. Alternative
strategies not selected for implementation can serve as contingency plans in case the strategy or
strategies selected do not work. U.S. companies and governments are increasingly considering
nuclear-generated electricity as the most efficient means of power generation. Many contingency
plans certainly call for nuclear power rather than for coaland gas-derived electricity. When
strategy-evaluation activities reveal the need for a major change quickly, an appropriate
contingency plan can be executed in a timely way. Contingency plans can promote a strategist‘s
ability to respond quickly to key changes in the internal and external bases of an organization‘s
current strategy. For example, if underlying assumptions about the economy turn out to be wrong
and contingency plans are ready, then managers can make appropriate changes promptly. In
some cases, external or internal conditions present unexpected opportunities. When such
opportunities occur, contingency plans could allow an organization to quickly capitalize on them.
Linneman and Chandran reported that contingency planning gave users, such as DuPont, Dow
Chemical, Consolidated Foods, and Emerson Electric, three major benefits: (1) It permitted
quick response to change, (2) it prevented panic in crisis situations, and (3) it made managers
more adaptable by encouraging them to appreciate just how variable the future can be. They
suggested that effective contingency planning involves a seven-step process:

1. Identify both beneficial and unfavorable events that could possibly derail the strategy or
strategies.

2. Specify trigger points. Calculate about when contingent events are likely to occur.

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3. Assess the impact of each contingent event. Estimate the potential benefit or harm of each
contingent event.

4. Develop contingency plans. Be sure that contingency plans are compatible with current
strategy and are economically feasible.

5. Assess the counter impact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event. Doing this will
quantify the potential value of each contingency plan.

6. Determine early warning signals for key contingent events. Monitor the early warning signals.

7. For contingent events with reliable early warning signals, develop advance action plans to take
advantage of the available lead time.

7.6. Participants in Strategic Evaluation and Control

Since strategic evaluation and control is a part of strategic management process, all those persons
who participate in strategy formulation and implementation should also participate in strategic
evaluation except those who act in advisory capacity .Board of directors, chief executive, other
managers, corporate ,planning staff, consultants participate in strategic managen1ent process.
Out of these corporate planning staff and consultants act either advisors or facilitators. Thus,
three groups of personnel are actively involved in strategic evaluation and control though their
areas of evaluation and control differ.

In some cases, outside agencies like financial institutions or government, mostly to the case of
public sector enterprises also participate in strategic evaluation and control either through their
participation in board of directors or having power to interfere with management practices.
However, the role of financial institutions in strategic evaluation and control is quite limited
excel through their nominee‘s on board of directors. In the case of public sector enterprises, the
role of government in strategic evaluation is perform through nomination of board members and
through controlling ministries of particular enterprises. In some specific situations, authorities
may be constituted at above the board level to evaluate the performance of group companies. The
role of board of directors, chief executive, and other managers in strategic evaluation and control
is quite significant.

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Role of Board of Directors

Board of directors of a company, being the trustee of shareholders‘ property, is directly

answerable to-them. Thus, board should be directly involved in strategic evaluation and control.
However, since board does not participate in day-to-day management process, it evaluates the
performance of the company concerned after certain intervals in its meetings.

Therefore, the role of board of directors is limited to evaluating and controlling those aspects of
the organizational functioning which have long-term implications. Such aspects are overall
financial performance, overall social concern and performance, and certain key management
practices having significant impact on organization‘s long-term survival. Generally, the
evaluation and control information used by the board is concise but comprehensive as compared
to control reports used at lower levels.

Role of Chief Executive

The chief executive of an organization is responsible for overall performance. Therefore, his/her
role is quite crucial in strategic evaluation and control. Though he/she is not involved in
evaluation of routine performance which is left to other managers, he/she focuses his/her
attention on critical variations between planned and actual. Generally, he applies the principle of
management by exception which is a system of identification and communication of that signal
which is critical and needs the attention of a high-level manager. Depending on the size of the
organization, the chief executive‘s role varies in the context of evaluation and control on day-to-
day basis. In a smaller organization, the chief executive may, perhaps, be interested in daily
production and cost figures, but in a large organization, these become unimportant for him from
his control point of view. Thus, in a large organization, the chief executive is more involved on
controlling through return on investment, value added, and other indicators which measure
performance of overall organization.

Role of Other Managers

Besides board of directors and chief executive, other managers are also involved in strategic
evaluation and control. These are finance managers, SBU managers, and middle-level managers.
Their role in strategic evaluation and control is as follows:

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1. Finance managers are primarily concerned with finding out deviations between planned and
actual performance expressed in monetary terms. These are done through financial analysis,
budgeting, etc.

2. SBU managers are responsible for overall evaluation and control of their respective strategic
business units. In fact, they are the chief executives of their own SBUs except that they report to
the chief executive of the organization from whom they seek directions.

3. Middle-level managers/operational managers, mostly functional managers and subunit

managers are responsible for evaluation and control of their respective functions and sub-units.
These managers are more concerned with day-to-day operational control and prepare reports to
be used by higher-level managers. For example, a production manager is more interested in
controlling production volume, production cost, product quality, etc.

Role of Organizational Systems in Evaluation

Strategic evaluation operates in the context of various organizational systems. An organization

develops various systems which help in integrating various parts of the organization. The major
organizational systems are: information system, planning system, motivation system, appraisal
system, and development system. All these systems play their role in strategic evaluation and
control. Some of these systems are closely and directly related and some are indirectly related to
evaluation and control. For example, information system is closely linked to evaluation as it
provides clue as to how the organization is progressing. Development system, on the other hand,
is not closely linked to evaluation system but is undertaken as a post-control action. In the light
of this, let us see how various organizational systems play their role in strategic evaluation and
control.

Information System

Evaluation and control action is guided by adequate information from the beginning to the end.
Management information and management control systems are closely interrelated; the
information system is designed on the basis of control system. Every manager in the organization
must have adequate information about his performance, standards, and how he/she is
contributing to the achievement of organizational objectives. There must be a system of

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information tailored to the specific management needs at every level, both in terms of adequacy
and timeliness.

Control system ensures that every manager gets adequate information. The criterion for
adequacy of information to a manager is his/her responsibility and authority, which is in the
context of his/her responsibility and authority, what type of information the manager needs. This
can be determined on the basis of careful analysis of the manager‘s functions. If the manager is
not using any information for taking certain action, the information may be meant of informing
him only and not falling within his information requirement. Thus, an effective control system
ensures the flow of the information that is required by an executive, nothing more or less. There
is another aspect of information for control and other function, that is, the timeliness –
information. Ideally speaking, the manager should be supplied information when he/she needs it
for taking action. For correcting the deviation timely action is require by the manager concerned.
For this purpose must have the information at proper time and covering the functioning of a
period which is subject to control. The control system functions effective, on the basis of the
information which is supplied in the organization. However, the information is used as a guide
and on this basis, identifies what action can be taken.

Planning System

Planning is the basis for control in the sense that it provides the entire spectrum on which control
function is based. In fact, these two terms are often used together in the designation of the
department which carries production planning, scheduling and routing. It emphasizes that there is
a plan which directs the behavior and activities in the organization. Control measures these
behavior and activities and suggests measures to remove deviation, if any. Control further
implies the existence of certain goals and standards. These goals are provided by the planning
process. Control is the result of particular plans, goals, or policies. Thus, planning offers and
affects control. Not only that, the planning is also affected by control in the sense that many of
the information provided by control are used for planning and preplanning. Thus, there is a
reciprocal relationship between planning and control.

Since planning and control systems are closely interlinked, there should be proper integration of
the two. This integration can be achieved by developing consistency of strategic objectives and

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performance measures. Prescribing performance measures which are strategically important is
quite significant because often it is said ‗what you measure is what you get‘. In developing
performance measures, two considerations must be taken into account. First, the performance
measures should focus on whether short-term profitability, or growth and technological
ascendancy, or logistic efficiency, or some other objectives should be of primary concern.
Second, the measures should relate to the managerial domain of each of the managers as each of
them is responsible to exercise control in is own domain.

Motivation System

Motivation system is not only related to evaluation and control system but to the entire
organizational processes. As we have seen earlier in this chapter, lack of motivation on the part
of managers is a significant barrier in the process of evaluation and control. Since the basic
objective of evaluation and control is to ensure that organizational objectives are achieved,
motivation plays a central role in this process. It energizes managers and other employees in the
organization to perform better which is the key for organizational success.

Appraisal System

Appraisal or performance appraisal system involves systematic evaluation of the individual with
regard to his performance on the job and his potential for development. While evaluating an
individual, not only his performance is taken into consideration but also his abilities and
potential for better performance. Thus, appraisal system provides feedback for control system
about how individuals are performing.

Development System

Development system is concerned with developing personnel to perform better in their present
positions and likely future positions that they are expected to occupy. Thus, development system
aims at increasing organizational capability through people to achieve better results. These
results, then, become the basic for evaluation and control.

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6.7. Stages of Control

Depending on the stages at which control is exercised, it may be of three types: (1) control of
inputs that are required in an action, known as feed forward control; (2) control at different
stages of action process, known as concurrent, real-time, or steering control; and (3) post action
control based on feedback from the completed action, known as feedback control. Control at
various stages of action is presented by the following figure.

Feed Forward Control

Feed forward control involves evolution of inputs and taking corrective action before a particular
sequence of operation is completed. Thus, it attempts to remove the limitations of time lag in
taking corrective action. Feed forward control monitors inputs into a process determine whether
the inputs are as planned. If inputs are not as planned corrective action is taken to adjust the
inputs according to the plan so that the desired results are achieved within the planned inputs. It
is just like hunting a duck. A hunter will always aim ahead of a duck‘s flight compensate for the
time lag between a shot and a hoped for hit. To be effective, feed forward control should meet
the following requirements:

1. Thorough and careful analysis of the planning and control system must be made, and the more
important input variables identified.

2. A model of the system should be developed.

3. The model should be reviewed regularly to see whether the input variables identified and their
relationship still represent realities.

4. Data on input variables must be regularly collected and put into the system.

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5. The variations of actual input data from planned inputs must be regularly assessed, and their
impact on expected results is evaluated.

6. Action must be taken to show people problems and the measure required to solve them.

Concurrent Control

Concurrent control is exercised during the operation of a program. It provides measures for
taking corrective action or making adjustments while the program is still in operation and before
any ma damage is done. In the organizational context, many control activities are based on this
type of control, for example, quality control during the operation, or safety check in a factory.
Here, the focus is on the process itself. Data provided by this control system is used to adjust the
process. Many strategic controls fall in this category.

Feedback Control

Feedback control is based on the measurement of the results of an action. Based on this
measurement, if any deviation is found between performance standards and actual performance,
the corrective action is undertaken as shown in Figure. The control aims at future action of the
similar nature so that there is conformity between standards and actual. This is required because,
sometimes, feed forward or concurrent control is not possible to apply, for example, many
personal characteristics of an individual which go into behavioral processes are not measurable,
and hence feed forward control is difficult to apply. In the business organizations, top
management control is mostly based on feedback. To Intake feedback control effective, it is
essential that corrective action is taken as soon-as possible.

7.7. Control Process

Control, particularly operational control, is exercised by a process consisting of four major steps
as shown in following figure.

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Objectives Performance Objectives Objectives Objectives
strategies plans standards strategies plans strategies plans strategies plans

Feedback

Figure: The control process

As indicated in the figure, the four steps are as follows:

1. Setting performance standards

2. Measuring actual performance

3. Analyzing variance

4. Taking corrective actions.

Setting Performance Standards

Every function in the organizations begins with plans which are goals, objectives, or targets to be
achieved.. In the light of these, standards are established which are criteria against which actual
results are measured. For setting standards for control purposes, it is important to identify clearly
and precisely the results which are desired. Precision in the statement of these standards is
important. In many areas, great precision is possible. However, in some areas, standards are less
precise. Standards may be precise if they are set in quantities-physical, such as volume of
products, man hour or monetary, such as costs, revenues, investment. They may also be in
qualitative terms which measure performance. After setting the standards, it is also important to
decide about the level of achievement or performance which will be regarded as good or
satisfactory. There are several characteristics of a particular work that determine good
performance. Important characteristics which should be considered while determining any level
of performance as good for some operations are: (i) output, (ii) expense, and (iii) resources.

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Expense refers to services or functions which may be expressed in quantity, for achieving a
particular level of output. Resources refer to capital expenditure, human resources, etc. after
identifying these characteristics, the desired level of each characteristic is determined. The
desired level of performance should be reasonable and feasible. The level should have some
amount of flexibility also, and should be stated in terms of range-maximum and minimum.

Control standards are most effective when they are related to the performance of a specific
individual; because a particular individual can be made responsible for specific results. However,
sometimes accountability for a desired result is not so simply assigned; for example, the decision
regarding investment in inventory- is affected by purchase, rate of production, and sales. In such
a situation, where no one person is accountable for the levels of inventories, standards may be set
for each step that is being performed by a person.

Measuring Actual Performance

The second major step in control process is the measurement of performance. The step involves
measuring the performance in respect of a work in terms of control standards. The presence of
standard implies a corresponding ability to observe and comprehend the nature of existing
conditions and to ascertain the degree of control being achieved.

The measurement of performance activity includes; comparing expected results to actual result,
investigating deviations from plans, evaluating individual performance, and examining progress
being made toward meeting stated objectives. Failure to make satisfactory progress towards
accomplishing goals signals a need for corrective actions.

The measurement of performance against standards should be on a future basis, so that

deviations may be detected in advance of their actual occurrence and avoided by appropriate
actions. Appraisal of actual or expected performance becomes an easy task, if standards are
properly determined and methods of measuring performance which can be expressed in physical
and monetary terms, such as production units, sales volume, profits, etc. can be easily and
precisely measurable. The performance which is qualitative and intangible, such as human
relations, employee morale, etc. cannot be measured precisely. For such purposes, techniques
like psychological tests and opinion surveys may be applied. Such techniques draw heavily from
intuitive judgment and experience, and these tools are far from exact. According to Peter
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Drucker, it is very much desirable to have clear and common measurements in all key areas of
business. It is not necessary that measurements are rigidly quantitative. In his opinion, for
measuring tangible and intangible performance, measurement must be (i) clear, simple, and
rational, (ii) relevant, (iii) direct attention and efforts, and (iv) reliable, self-announcing, and
understandable without complicated interpretation or philosophical discussions.

Analyzing Variance

The third major step in control process is the comparison of actual and standard performance. It
involves two steps: (i) finding out the extent of deviations, and (ii) identifying the causes of such
deviations. When adequate standards are developed and actual performance is measured
accurately, any variation will be clearly revealed. Management may have information relating to
work performance, data, charts, graphs and written reports, besides personal observation to keep
itself informed about performance in different segments of the organization. Such performance is
compared with the standard to find out whether the various segments and individuals of the
organization are progressing in the right direction.

When the standards are achieved, no further managerial action is necessary and control process
is complete. However, standards may not be achieved in all cases and the extent of variations
may differ from case to case. Naturally, management is required to determine whether strict
compliance with standards is required or there should be a permissible limit of variation. In fact,
there cannot be any uniform practice for determining such variations. Such variations depend
upon the type of activity. For example, a very minute variation in engineering products may be
significant than a wide variation in other activities.

When the deviation between standard and actual performance is beyond the prescribed limit, an
analysis is made of the causes of such deviations. For controlling and planning purposes,
ascertaining the causes of variations along with computation of variations is important because
such analysis helps management in taking up proper control action. The analysis will pinpoint
the causes which ate controllable by the person re-possible. In such a case, person concerned will
take necessary corrective action. However, if the variation is caused by uncontrollable factors the
person concerned cannot be held responsible and he cannot take any action.

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Measurement of performance.‘ analysis of deviations and their causes may be of no use unless
these are communicated to the person who can take corrective action. Such communication is
presented generally in the form of a report showing performance standard, actual performance,
deviations between those two, tolerance limits, and causes for deviations. As soon as possible
reports containing control information should be sent to the person whose performance is being
measured and controlled. The underlying philosophy is that the person who is responsible for a
job can have a better influence on final results by his own action. A summary of the control
report should be given to the superior concerned because the person on the job may either need
help of his superior in improving the performance or may need warning for his failure. In
addition, other people who may be interested in control reports are (i) executives engaged in
formulating new plans: and (ii) staff personnel who are expected to be familiar with control
information for giving any advice about the activity under control when approached.

Taking Corrective Actions

This is the last step in the control process which requires that actions should be taken to maintain
the desired degree of control in the system or operation. An organization is not a self-regulating
system such as thermostat which operates in a state of equilibrium put there by engineering
design. In a business organization, this type of automatic control cannot be established because
the state of affairs that exists is the result of so many factors in the total environment. Thus, some
additional actions are required to maintain the control. Taking corrective actions requires making
changes to reposition a firm competitive position for the future. Such actions may be on the
following lines:

1. Improvement in the performance by taking suitable actions if the performance is not up to the
mark: or

2. Resetting the performance standards if these are too high and unrealistic; or

3. Change the objectives, strategies and plans if these are not workable.

4. Altering organizational structure, selling a division or revising a business mission.

Corrective actions should place an organization in a better position to capitalize it upon internal
strengths, to take advantage of key external opportunistic to avoid, reduce, or mitigate external

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threats, and to improve internal weaknesses. It should proper time horizon and an appropriate
amount of risk. It should also be internally consistent and socially responsible.
Take corrective actions raises employees and a manager‘s anxieties and resistance to change is
inevitable when such evaluation result in change. Therefore, there should be proper change
management practices.

7.8. Barriers in Strategic Evaluation and Control

Strategic evaluation and control being an appraisal process for the organization as a whole and
people who are involved in strategic management process either at the stage of strategy
formulation or strategy implementation or both, is not free from certain barriers and problems.
These barriers and problems centre around two factors: motivational and operational. Let us see
what these problems are and how these problems may be overcome.

Motivational Problems

The first problem in strategic evaluation is the motivation of managers (strategists) to evaluate
whether they have chosen correct strategy after its results are available. Often two problem; are
involved in motivation to evaluate the strategy: psychological problem and lack of direct
relationship between performance and rewards.

1. Psychological Barriers

Managers are seldom motivated to evaluate their strategies because of the psychological barriers
of accepting their mistakes. The strategy is formulated by top management which is very
conscious about its sense of achievement. It hardly appreciates any mistake it may be committed
at the level of strategy formulation. Even if something goes wrong at the level of strategy
formulation, it may put the blame on the operating management and tries to find out the faults at
the level of strategy implementation. This over-conscious approach of top management may
prevent the objective review of whether correct strategy has been chosen and implemented. This
may result into delay in taking correct alterative action and bringing the organization back at
satisfactory level. This happens more in the case of retrenchment strategy, particularly
divestment strategy where a particular business has failed because of strategic mistake and in
order to save the organization from further damage, the business has to be sold.

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2. Lack of Direct Relationship between Performance and Rewards

Another problem in motivation to review strategy is‘ the lack of direct relationship between
performance achievement and incentives. It is true that performance achievement itself is a
source of motivation but this cannot always happen. Such a situation hardly motivates the
managers to review their strategy correctly. This happens more in the case of family-managed
businesses where professional managers are treated as outsiders and top positions, particularly at
the board level, are reserved for insiders. Naturally very bright managers are not‘ motivated to
review correctness or otherwise of their strategy. The family managers of such organizations are
even more prone to psychological problem of not reviewing their strategy and admit their
mistakes. Thus, what is required for motivating managers to evaluate their performance and
strategy is the right type of motivational climate in the organization. This climate can be set by
linking performance and rewards as closely as possible. This linking is required not only for the
top level but for the lower down in the organization too. Many forward-looking companies
though few in number, have taken this step when they have adopted the policy of taking board
members from outside their families and friend groups. These companies have taken this- step
not only to satisfy the requirements of financial institutions of broad basing the directorship but
they have taken this step to motivate their top level managers. Naturally top managers in such
companies can take any step to fulfill the organizational requirements including the evaluation of
their strategy.

Operational Problems

Even if managers agree to evaluate the strategy, the problem of strategic evaluation is not over,
though a beginning has been made. This is so because strategic evaluation is an imprecise
process; many factors are not as clear as the managers would like these to be. These factors are
in the areas of determination of evaluative criteria, performance measurement, and taking
suitable corrective actions. All these are involved in strategic evaluation and control. However,
nebulousness nature is not unique to strategic evaluation and control only but it is unique to the
entire strategic management process. We shall make an attempt later in this chapter as to how
these operational problems may be overcome.

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